OFFICIAL STATEMENT Dated: March 11, 2015

Transcription

1 OFFICIAL STATEMENT Dated: March 11, 2015 NEW ISSUE - BOOK-ENTRY-ONLY RATINGS: Moody's: Aa1 S&P: AAA (See OTHER INFORMATION Ratings ) In the opinion of Co-Bond Counsel under existing law, interest on the Series 2015A Bonds will be excludable from gross income for federal income tax purposes. See TAX MATTERS Series 2015A Bonds" for a discussion of the opinion of Co-Bond Counsel, including a description of alternative minimum tax consequences. Interest on the Taxable Series 2015B Bonds will be included in gross income for federal income tax purposes. See TAX MATTERS Taxable Series 2015B Bonds for a discussion of the opinion of Co-Bond Counsel. $453,630,000 CITY OF DALLAS, TEXAS (Dallas, Denton, Collin and Rockwall Counties) Waterworks and Sewer System Revenue Refunding Bonds, Series 2015A $150,630,000 CITY OF DALLAS, TEXAS (Dallas, Denton, Collin and Rockwall Counties) Waterworks and Sewer System Revenue Refunding Bonds, Taxable Series 2015B Dated Date: Date of Delivery Due: October 1, as shown on Page 2 PAYMENT TERMS... Interest on the $453,630,000 City of Dallas, Texas Waterworks and Sewer System Revenue Refunding Bonds, Series 2015A (the Series 2015A Bonds ) and interest on the $150,630,000 City of Dallas, Texas Waterworks and Sewer System Revenue Refunding Bonds, Taxable Series 2015B Bonds (the Taxable Series 2015B Bonds and, together with the Series 2015A Bonds, the Bonds ) will accrue from the date of delivery and will be payable on October 1, 2015, and on each April 1 and October 1 thereafter until maturity or prior redemption. Interest on the Bonds will be calculated on the basis of a 360-day year consisting of twelve 30-day months. The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company, New York, New York ( DTC ), pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Bonds may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Bonds will be made to the owners thereof. Principal of and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds. See THE BONDS - Book-Entry-Only System herein. The initial Paying Agent/Registrar for the Bonds is U.S. Bank National Association (see THE BONDS - Paying Agent/Registrar ). AUTHORITY FOR ISSUANCE... The Bonds are issued pursuant to the general laws of the State of Texas, particularly Chapters 1207 and 1371, Texas Government Code, and by two separate ordinances (the Series 2015A Bond Ordinance and the Taxable Series 2015B Bond Ordinance and, together, the Ordinances ) passed by the City Council of the City of Dallas, Texas (the City ) on February 25, 2015, and are special obligations of the City, payable, both as to principal and interest, solely from and, together with certain outstanding parity bonds, secured by a first lien on and pledge of the Pledged Revenues (defined herein) of the City's Waterworks and Sewer System (the System ), which include the Net Revenues of the System remaining after deduction of current expenses of operation and maintenance. The City has not covenanted nor obligated itself to pay the Bonds from monies raised or to be raised from taxation (see THE BONDS Security and Source of Payment ). PURPOSE... Proceeds from the sale of the Bonds, together with other available System funds, if necessary, will be used to (i) refund certain outstanding bonds of the City (the Refunded Bonds ) (see Schedule I Schedule of Refunded Bonds ); and (ii) refund outstanding Commercial Paper Notes (the Refunded Notes and, together with the Refunded Bonds, the Refunded Obligations ). CUSIP Prefix: MATURITY SCHEDULE & 9 DIGIT CUSIP See Schedule on Page 2 LEGALITY... The Bonds are offered for delivery when, as and if issued and received by the Underwriters listed below (the Underwriters ) and subject to the approving opinions of the Attorney General of the State of Texas, and the opinions of Co-Bond Counsel, McCall, Parkhurst & Horton L.L.P. and Escamilla & Poneck, LLP, (see Appendix D - Forms of Co-Bond Counsel's Opinions ). Certain legal matters will be passed upon by the City by Andrews Kurth LLP, Dallas, Texas and Gonzales Saggio & Harlan, Atlanta, Georgia, Co-Disclosure Counsel for the City. Certain legal matters will be passed upon for the Underwriters by their Co-Counsel, Locke Lord LLP, Dallas, Texas and White & Wiggins, LLP, Dallas, Texas. DELIVERY... It is expected that the Bonds will be available for delivery through DTC on or about March 25, MORGAN STANLEY BOFA MERRILL LYNCH RAYMOND JAMES CABRERA CAPITAL MARKETS, LLC DUNCAN-WILLIAMS SIEBERT BRANDFORD SHANK & CO., L.L.C. RBC CAPITAL MARKETS J.P. MORGAN STEPHENS INC.

2 MATURITY SCHEDULE CUSIP Prefix: (1) $453,630,000 Waterworks and Sewer System Revenue Refunding Bonds, Series 2015A Maturity CUSIP (1) Maturity CUSIP (1) (October 1) Amount Rate Yield Suffix (October 1) Amount Rate Yield Suffix 2015 $ 2,850, % 0.125% 6A $ 25,510, % 2.670% (2) 6N ,085, % 0.250% 6B ,220, % 2.770% (2) 6P ,245, % 0.780% 6C ,980, % 2.830% (2) 6Q ,410, % 1.170% 6D ,650, % 2.890% (2) 6R ,585, % 1.450% 6E ,350, % 2.940% (2) 6S ,770, % 1.660% 6F ,505, % 2.980% (2) 6T ,965, % 1.870% 6G ,770, % 3.410% (2) 6U ,170, % 2.090% 6H ,940, % 3.450% (2) 6V ,390, % 2.210% 6J ,165, % 3.480% (2) 6W ,640, % 2.340% 6K ,105, % 3.530% (2) 6Z ,890, % 2.450% 6L ,435, % 3.560% (2) 7A ,610, % 2.560% (2) 6M1 $27,425, % Term Bonds Due October 1, 2040, Priced to Yield 3.620% (2) -CUSIP (1) Suffix: 6X7 $42,965, % Term Bonds Due October 1, 2044, Priced to Yield 3.260% (2) -CUSIP (1) Suffix:6Y5 (Interest accrues from the Date of Delivery) $150,630,000 Waterworks and Sewer System Revenue Refunding Bonds, Taxable Series 2015B Maturity CUSIP (1) Maturity CUSIP (1) (October 1) Amount Rate Yield Suffix (October 1) Amount Rate Yield Suffix 2019 $12,485, % 1.960% 7B $37,285, % 2.635% 7E ,690, % 2.210% 7C ,375, % 2.796% 7F ,795, % 2.485% 7D0 (Interest accrues from the Date of Delivery) (1) CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by Standard & Poor s Financial Services LLC on behalf of the American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. The Underwriters, the City, and the Co-Financial Advisors are not responsible for the selection or correctness of the CUSIP numbers set forth herein. (2) Yield shown is yield to the first optional call date, October 1, REDEMPTION... The City reserves the right, at its option, to redeem Series 2015A Bonds having stated maturities on and after October 1, 2026, in whole, or in part in principal amounts of $5,000 or any integral multiple thereof, on October 1, 2025 or on any date thereafter, at the redemption price of par plus accrued interest to the date fixed for redemption. The Taxable Series 2015B Bonds are not subject to redemption prior to maturity. 2

3 This Official Statement and the information contained herein are subject to completion and amendment. The Bonds may not be sold nor any offers to buy be accepted prior to the time the Official Statement is delivered in final form. Under no circumstances shall this Official Statement constitute an offer to sell or the solicitation of any offer to buy, nor shall there be any sale of the Bonds in any jurisdiction in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. This Official Statement, which includes the cover page, Schedule I and the Appendices hereto, does not constitute an offer to sell or the solicitation of an offer to buy in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale. No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon. The information set forth herein has been obtained from the City and other sources believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as the promise or guarantee of the City's Co-Financial Advisors. This Official Statement contains, in part, estimates and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates and opinions, or that they will be realized. All information contained in this Official Statement is subject, in all respects, to the complete body of information contained in the original sources thereof and no guaranty, warranty, or other representation is made concerning the accuracy or completeness of the information herein. In particular, no opinion or representation is rendered as to whether any projection will approximate actual results, and all opinions, estimates and assumptions, whether expressly identified as such, should not be considered statements of fact. The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under, the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. The information and expressions of opinion contained herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the City or other matters described. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE THE MARKET PRICE OF THE ISSUE AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE AGREEMENTS OF THE CITY AND OTHERS RELATED TO THE BONDS ARE CONTAINED SOLELY IN THE CONTRACTS DESCRIBED HEREIN. NEITHER THIS OFFICIAL STATEMENT NOR ANY OTHER STATEMENT MADE IN CONNECTION WITH THE OFFER OR SALE OF THE BONDS IS TO BE CONSTRUED AS CONSTITUTING AN AGREEMENT WITH THE PURCHASERS OF THE BONDS. INVESTORS SHOULD READ THE ENTIRE OFFICIAL STATEMENT, INCLUDING ALL SCHEDULES AND APPENDICES ATTACHED HERETO, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION. THE BONDS ARE EXEMPT FROM REGISTRATION WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH. THE REGISTRATION, QUALIFICATION, OR EXEMPTION OF THE BONDS IN ACCORDANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTIONS IN WHICH THE BONDS HAVE BEEN REGISTERED, QUALIFIED, OR EXEMPTED SHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF. All information contained in this Official Statement is subject, in all respects, to the complete body of information contained in the original sources thereof and no guaranty, warranty, or other representation is made concerning the accuracy or completeness of the information herein. In particular, no opinion or representation is rendered as to whether any projection will approximate actual results, and all opinions, estimates and assumptions, whether expressly identified as such, should not be considered statements of fact. Neither the City nor the Underwriters make any representation regarding the information contained in this Official Statement regarding The Depository Trust Company or its Book-Entry-Only System, as such information has been furnished by DTC. CUSIP numbers have been assigned to this issue by CUSIP Global Services, and are included solely for the convenience of the owners of the Bonds. Neither the City nor the Underwriters shall be responsible for the selection or correctness of the CUSIP numbers shown on the inside cover page. This Official Statement contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance and achievements to be different from future results, performance and achievements expressed or implied by such forward-looking statements. Investors are cautioned that the actual results could differ materially from those set forth in the forwardlooking statements (see OTHER INFORMATION Forward-Looking Statements ). 3

4 TABLEOFCONTENTS OFFICIAL STATEMENT SUMMARY...5 SELECTED WATER AND WASTEWATER SYSTEM INDICES...6 CITY OFFICIALS, STAFF AND CONSULTANTS...7 ELECTED OFFICIALS...7 SELECTED ADMINISTRATIVE STAFF...8 DALLAS WATER UTILITIESDEPARTMENT MANAGEMENT OFFICIALS...8 CONSULTANTS AND ADVISORS...8 INTRODUCTION...9 PLAN OF FINANCING...9 THE BONDS...10 THE WATER AND WASTEWATER SYSTEM...18 TABLE 1 WHOLESALE TREATED WATER CUSTOMERS...23 TABLE2-TREATED WATER PUMPAGE...24 TABLE 3 TREATED WATER CONSUMPTION BY CUSTOMER CLASS...24 TABLE 4A TEN LARGEST WHOLESALE TREATED WATER CUSTOMERS...24 TABLE 4B TEN LARGEST RETAIL TREATED WATER CUSTOMERS TABLE 5 WHOLESALE WASTEWATER CUSTOMERS.26 TABLE6 TREATEDWASTEWATER FLOW...26 TABLE 7 RETAIL CUSTOMER CHARGE...27 TABLE 8 RETAIL USAGE CHARGE...28 TABLE 9 WHOLESALE CUSTOMER CHARGES...29 OTHER INFORMATION RATINGS LITIGATION CLEAN AIR ACT AMENDMENTS OF CONTINUING DISCLOSURE OF INFORMATION REGISTRATION AND QUALIFICATION OF BONDS FOR SALE LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS LEGAL OPINIONS VERIFICATION OF ARITHMETICAL AND MATHEMATICAL COMPUTATIONS UNDERWRITING CO-FINANCIAL ADVISORS FORWARD-LOOKING STATEMENTS SCHEDULE I...SCHEDULE OF REFUNDED BONDS APPENDICES GENERAL INFORMATION REGARDING THE CITY...A SELECTED PROVISIONS OF THE BOND ORDINANCES...B DALLAS WATER UTILITIES FINANCIAL STATEMENTS...C FORMS OF CO-BOND COUNSEL'S OPINIONS...D The cover page hereof, this page, the schedules and appendices included herein and any addenda, supplement or amendment hereto, are part of the Official Statement. DEBT INFORMATION...30 TABLE10 - WATERWORKS AND SEWER SYSTEM REVENUE BOND REQUIREMENTS...30 TABLE 11 HISTORICAL COVERAGE RATIOS...31 TABLE12 OPERATIONS ANDMAINTENANCE FOR WATER SUPPLY AND WASTEWATER TREATMENT...32 FUTURE BOND ISSUANCE...33 FINANCIAL INFORMATION...34 TABLE 13 SUMMARY OF OPERATIONS...34 TABLE 14 PROJECTED COVERAGE AND FUND BALANCES...35 TABLE 15 SUMMARY OF NET REVENUES FOR REVENUE BOND COVERAGE -CASH BASIS...35 TABLE16 NET POSITION AND LONG TERM DEBT...36 TABLE 17 - CURRENT INVESTMENTS...42 TAX MATTERS

5 OFFICIAL STATEMENT SUMMARY This summary is subject in all respects to the more complete information and definitions contained or incorporated in this Official Statement. The offering of the Bonds to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement. THE ISSUER... The City of Dallas, Texas (the City ), is a political subdivision located in Dallas, Denton, Collin and Rockwall Counties operating as a home-rule city under the laws of the State and a charter initially approved by the voters in The City operates under the City Council/Manager form of government where the Mayor is elected for a four-year term and fourteen City Councilmembers are each elected for two-year terms. The Mayor s term is limited to two consecutive terms and the fourteen Councilmembers are limited to four consecutive terms. The City Council formulates operating policy for the City while the City Manager is the chief administrative officer. THE BONDS... The City is among the three most populous cities in Texas and among the ten most populous cities in the U.S. The City is approximately 378 square miles in area (see Appendix A - General Information Regarding the City ). The $453,630,000 City of Dallas, Texas Waterworks and Sewer System Revenue Refunding Bonds, Series 2015A (the Series 2015A Bonds ) are issued as serial bonds maturing on October 1 in each of the years 2015 through and including 2037, and as Term Bonds maturing on October 1, 2040 and October 1, The $150,630,000 City of Dallas, Texas Waterworks and Sewer System Revenue Refunding Bonds, Taxable Series 2015B (the Taxable Series 2015B Bonds ) are issued as serial bonds maturing on October 1 in each of the years 2019 through and including The Series 2015A Bonds and the Taxable Series 2015B Bonds are collectively referred to as the Bonds. The Bonds shall mature on the dates as shown on the inside cover of this Official Statement (see THE BONDS - Description of the Bonds ). PAYMENT OF INTEREST... Interest on the Bonds accrues from their date of delivery, and is payable commencing October 1, 2015 and on each April 1 and October 1 thereafter until maturity or prior redemption (see THE BONDS - Description of the Bonds, THE BONDS Optional Redemption and THE BONDS Mandatory Sinking Fund Redemption ). AUTHORITY FOR ISSUANCE... SECURITY FOR THE BONDS... REDEMPTION... TAX EXEMPTION... The Bonds are issued pursuant to the general laws of the State, particularly Chapters 1207 and 1371, Texas Government Code, and the ordinances passed by the City Council of the City. The Bonds constitute special obligations of the City payable, both as to principal and interest, solely from and secured, together with parity bonds currently or hereafter outstanding, by a first lien on and pledge of the Pledged Revenues of the City's Waterworks and Sewer System, which include the Net Revenues of the System remaining after deduction of current expenses of operation and maintenance. The City has not covenanted nor obligated itself to pay the Bonds from monies raised or to be raised from taxation (see THE BONDS - Security and Source of Payment ). The City reserves the right, at its option, to redeem the Series 2015A Bonds having stated maturities on and after October 1, 2026 on October 1, 2025 or any date thereafter at the par value thereof, plus accrued interest to the date fixed for redemption (see THE BONDS Optional Redemption ). The Series 2015A Bonds maturing on October 1 in each of the years 2040 and 2044 are subject to mandatory sinking fund redemption prior to their scheduled maturities (see THE BONDS Mandatory Sinking Fund Redemption ). The Taxable Series 2015B Bonds are not subject to redemption prior to maturity. In the opinion of Co-Bond Counsel, the interest on the Series 2015A Bonds will be excludable from gross income for federal income tax purposes under existing law, subject to the matters described under the caption TAX MATTERS Series 2015A Bonds herein, including the alternative minimum tax on corporations. The Taxable Series 2015B Bonds are not issued as tax exempt obligations. Accordingly, the interest on the Taxable Series 2015B Bonds is includable in gross income. See TAX MATTERS Taxable Series 2015B Bonds 5

6 USE OF PROCEEDS... Proceeds from sale of the Bonds, together with other available System funds, if necessary, will be used to: (i) refund certain outstanding bonds of the City (the Refunded Bonds ) (see Schedule I Schedule of Refunded Bonds ); and (ii) refund outstanding Commercial Paper Notes (the Refunded Notes ). RATINGS... Moody s Investors Service, Inc. ( Moody s ) and Standard & Poor s Ratings Services, a Standard & Poor s Financial Services LLC business ( S&P ), have assigned ratings of Aa1 and AAA, respectively, to the Bonds. An explanation of the significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only the respective views of such organizations and the City makes no representation as to the appropriateness of the ratings. (See OTHER INFORMATION Ratings ). PAYMENT RECORD... The City has never defaulted in payment of its bonds. BOOK-ENTRY-ONLY SYSTEM... The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of DTC pursuant to the Book-Entry-Only System described herein. Beneficial ownership of the Bonds may be acquired in denominations of $5,000 or integral multiples thereof. No physical delivery of the Bonds will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., which will make distributions of the amounts so paid to the participating members of DTC for subsequent payment to the beneficial owners of the Bonds (see THE BONDS - Book-Entry- Only System ). SELECTED WATER AND WASTEWATER SYSTEM INDICES Fiscal Net Revenes Average Coverage Year Treated Water Pumpage (Thousand Gallons) Available Annual Debt of Ended Dallas Average Peak For Service Debt 9/30 Population Day Day Total Debt Service Requirements Service ,197,816 (1) 388, , ,658,000 $ 238,395,000 $ 93,864, x ,200,530 (2) 428, , ,202, ,196,000 97,453, x ,207,420 (2) 395, , ,604, ,788, ,145, x ,213,600 (2) 391, , ,878, ,069, ,758, x ,232,360 (2) 369, , ,792,000 N/A 107,961,340 N/A (1) 2010 US Census Bureau. (2) Source: North Central Texas Council of Governments, estimated. For additional information regarding the City, please contact: Ms. Jeanne Chipperfield Mr. Wayne B. Placide Mr. Noe Hinojosa, Jr. Chief Financial Officer Mr. Steve Johnson Mr. U.S. Williams City of Dallas or First Southwest Company, LLC or Estrada Hinojosa & Company, Inc Marilla Street, 4DN 325 N. St. Paul, Suite Main St., 47 th Floor Dallas, Texas Dallas, Texas Dallas, Texas (214) (214) (214)

7 CITY OFFICIALS, STAFF AND CONSULTANTS ELECTED OFFICIALS Length of Service as of City Council Term Expires March 1, 2015 Occupation Mike Rawlings June, Years, 8 Months Private Equity (Vice-Chairman) Mayor - Place 15 Scott Griggs (formerly Place 3) June, Years, 8 Months Attorney Councilmember - Place 1 Adam Medrano June, Year, 8 Months Civic Leader Councilmember - Place 2 Vonciel Jones Hill (formerly Place 5) June, Years, 8 Months Attorney Councilmember - Place 3 Dwaine Caraway June, Years, 8 Months Civic Leader Councilmember - Place 4 Rick Callahan June, Year, 8 Months Real Estate Broker Councilmember - Place 5 Monica Alonzo June, Years, 8 Months Civic Leader Deputy Mayor Pro Tem - Place 6 Carolyn Davis June, Years, 8 Months Civic Leader Councilmember - Place 7 Tennell Atkins June, Years, 8 Months Entrepreneur Mayor Pro Tem - Place 8 Sheffield Kadane Jr. June, Years, 8 Months Investor and Real Estate Broker Councilmember - Place 9 Jerry Allen June, Years, 8 Months Banker Councilmember - Place 10 Lee M. Kleinman June, Year, 8 Months Investor Councilmember - Place 11 Sandy Greyson June, Years, 8 Months Community Volunteer Councilmember - Place 12 Jennifer S. Gates June, Year, 8 Months Community Volunteer/Registered Nurse Councilmember - Place 13 Philip Kingston June, Year, 8 Months Commercial Litigator Councilmember - Place 14 7

8 SELECTED ADMINISTRATIVE STAFF Length of Time in Tenure with City This Position as of of Dallas as of Name Position March 1, 2015 March 1, 2015 A.C. Gonzalez City Manager 1 Year 14 Years, 8 Months Ryan S. Evans First Assistant City Manager 1 Year 30 Years Jill A. Jordan, P.E. Assistant City Manager 16 Years, 2 Months 32 Years, 3 Months Eric Campbell Assistant City Manager 5 Months 5 Months Mark McDaniel Assistant City Manager 6 Months 6 Months Joey Zapata Assistant City Manager 3 Years, 9 Months 20 Years, 10 Months Jeanne Chipperfield Chief Financial Officer 5 Years, 1 Month 20 Years, 10 Months Warren Ernst City Attorney 1 Year 11 Years, 5 Months Rosa A. Rios City Secretary 3 Years, 1 Month 8 Years, 7 Months Craig Kinton City Auditor 8 Years, 5 Months 8 Years, 5 Months DALLAS WATER UTILITIES DEPARTMENT MANAGEMENT OFFICIALS Length of Time in Tenure with City This Position as of of Dallas as of Name Position March 1, 2015 March 1, 2015 Jo M. Puckett, P.E. Director of Water Utilites 9 Years, 11 M onths 33 Years, 2 M onths Terry S. Lowery Assistant Director, Business Operations 5 Years 23 Years, 4 Months Richard Wagner, P.E. * Interim Assistant Director, Capital Improvements 20 Years, 9 M onths Randall Payton Assistant Director, Water Operations 3 Years, 7 Months 24 Years, 4 Months Zachary Peoples Assistant Director, Wastewater Operations 2 Years, 2 M onths 21 Years, 3 M onths Sheila E. Delgado Assistant Director, Customer Operations 6 Years, 9 Months 20 Years Ade Williams Assistant Director, Utility Systems Operations 4 Years, 2 M onths 16 Years, 4 M onths Kenneth Delregno Assistant Director, Water Production 1 Year, 9 Months 30 Years, 5 Months * Richard Wagner was appointed Interim Assistant Director on March 18, CONSULTANTS AND ADVISORS Auditors...Grant Thornton LLP Dallas, Texas Co-Bond Counsel... McCall, Parkhurst & Horton L.L.P. Dallas, Texas Escamilla & Poneck, LLP Dallas, Texas Co-Disclosure Counsel...Andrews Kurth LLP Dallas, Texas Gonzales Saggio & Harlan LLP Atlanta, Georgia Co-Financial Advisors...First Southwest Company, LLC Dallas, Texas Estrada Hinojosa & Company, Inc. Dallas, Texas 8

9 OFFICIAL STATEMENT RELATING TO $453,630,000 CITY OF DALLAS, TEXAS WATERWORKS AND SEWER SYSTEM REVENUE REFUNDING BONDS, SERIES 2015A $150,630,000 CITY OF DALLAS, TEXAS WATERWORKS AND SEWER SYSTEM REVENUE REFUNDING BONDS, TAXABLE SERIES 2015B INTRODUCTION This Official Statement, which includes the Appendices and Schedule I hereto, provides certain information regarding the issuance of $453,630,000 City of Dallas, Texas Waterworks and Sewer System Revenue Refunding Bonds, Series 2015A (the Series 2015A Bonds ) and $150,630,000 City of Dallas, Texas Waterworks and Sewer System Revenue Refunding Bonds, Taxable Series 2015B (the Taxable Series 2015B Bonds ) and are referred to collectively as the Bonds. Capitalized terms used in this Official Statement have the same meanings assigned to such terms in the ordinances adopted on February 25, 2015, which authorized the issuance of the Bonds (collectively, the Ordinances ), except as otherwise indicated herein (see Appendix B Selected Provisions of the Bond Ordinances - Definitions ). This Official Statement includes descriptions of the Bonds and certain information regarding the City and its finances. All descriptions of documents contained herein are summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from First Southwest Company, LLC, Dallas, Texas, and Estrada, Hinojosa & Co., Inc., Co-Financial Advisors to the City of Dallas, Texas (the City ). DESCRIPTION OF THE CITY...The City is a political subdivision located in Dallas, Denton, Collin and Rockwall Counties, operating as a home rule city under the laws of the State of Texas (the State ) and a charter first approved by the voters in 1907 (the City Charter ). The City operates under a Council/Manager form of government with a City Council comprised of the Mayor and fourteen Council members. The Mayor is elected for a four-year term and the fourteen Council members are each elected for two-year terms. Each of the fourteen Council members represents a district within the City. The City Manager is the chief administrative officer for the City. Some of the services that the City provides are: public safety (police and fire protection), highways and streets, water and sanitary sewer utilities, environmental and health services, culture-recreation, public improvements, planning and zoning, and general administrative services. The 2014 estimated population for the City was 1,232,360. The City covers approximately 378 square miles. PLAN OF FINANCING PURPOSE... Proceeds from the sale of the Bonds, together with other available System funds, if necessary, will be used to: (i) refund certain outstanding bonds of the City (the Refunded Bonds ) (see Schedule I Schedule of Refunded Bonds ); and (ii) refund outstanding Commercial Paper Notes (the Refunded Notes ). REFUNDED NOTES...TheprincipalandinterestdueontheRefundedNotesaretobepaidontheirscheduledmaturitydatefrom funds to be deposited with U.S. Bank National Association, the issuing and paying agent for the Refunded Notes. The Series 2015A Bond Ordinance provides that from a portion of the proceeds of the sale of the Series 2015A Bonds received from the Underwriters, together with other available funds of the City, the City will deposit with U.S. Bank National Association, as issuing and paying agent for the Refunded Notes, an amount sufficient to accomplish the discharge and final payment of the Refunded Notes on their scheduled maturity dates. REFUNDED BONDS... The principal and interest due on the Refunded Bonds are to be paid on the scheduled interest payment dates and the redemption date of such Refunded Bonds, from funds to be deposited pursuant to a certain Escrow Agreement (the Escrow Agreement ) between the City and U.S. Bank National Association, Dallas, Texas (the Escrow Agent ). The Ordinances provide that from a portion of the proceeds of the sale of the Bonds received from the Underwriters, the City will deposit with the Escrow Agent an amount which, togetherwith theescrowed Securities (definedbelow) purchased with aportionofthebondproceeds and the interest to be earned on such Escrowed Securities, will be sufficient to accomplish the discharge and final payment of the Refunded Bonds on their respective redemption dates. Such funds will be held by the Escrow Agent in a special escrow account (the Escrow Fund ) and used to purchase direct noncallable obligations of the United States, including obligations that are unconditionally guaranteed by the United States (the Escrowed Securities ). Under the Escrow Agreement, the Escrow Fund is irrevocably pledged to the payment of the principal of and interest on the Refunded Bonds. Grant Thornton LLP (the Verification Agent ), a nationally recognized accounting firm, will verify at the time of delivery of the Bonds to the Underwriters the mathematical accuracy of the schedules that demonstrate the Escrowed Securities will mature and 9

10 pay interest in such amounts which, together with uninvested funds in the Escrow Fund, will be sufficient to pay, when due, the principal of and interest on the Refunded Bonds on the respective redemption dates with respect to the Refunded Bonds. Such maturing principal of and interest on the Escrowed Securities will not be available to pay the Bonds (see OTHER INFORMATION - Verification of Arithmetical and Mathematical Computations ). By the deposit of the Escrowed Securities and cash, if necessary, with the Escrow Agent pursuant to the Escrow Agreement, the City will effect the defeasance of all of the Refunded Bonds in accordance with the law. It is the opinion of Co-Bond Counsel that as a result of such defeasance and in reliance upon the report of the Verification Agent, the Refunded Bonds will be outstanding only for the purpose of receiving payments from the Escrowed Securities and any cash held for such purpose by the Escrow Agent and such Refunded Bonds will not be deemed as being outstanding obligations of the City payable from System revenues nor for the purpose of applying any limitation on the issuance of debt. In the Escrow Agreement, the City covenants to make timely deposits to the Escrow Fund, from lawfully available funds, of any additional amounts required to pay the principal of and interest on the Refunded Bonds, if for any reason, the cash balances on deposit or scheduled to be on deposit in the Escrow Fund are insufficient to make such payment. THE BONDS DESCRIPTION OF THE BONDS... The Bonds are dated as of their date of delivery (the Dated Date ), and will mature on October 1 in each of the years and in the amounts shown on page 2 hereof. Interest will accrue from their Date of Delivery, will be computed on the basis of a 360-day year of twelve 30-day months and will be payable on October 1, 2015 and on each April 1 and October 1 thereafter until maturity or prior redemption. AUTHORITY FOR ISSUANCE...TheBonds are issued pursuant to the general laws of the State of Texas, particularly Chapters 1207 and 1371, Texas Government Code, and the Ordinances and are special obligations of the City, payable, both as to principal and interest, solely from and, together with certain outstanding parity bonds, secured by a first lien on and pledge of the Pledged Revenues of the System, which include the Net Revenues of the System remaining after deduction of current expenses of operation and maintenance. The City has not covenanted nor obligated itself to pay the Bonds from monies raised or to be raised from taxation (see THE BONDS Security and Source of Payment ). SECURITY AND SOURCE OF PAYMENT...The Bonds, together with certain outstanding revenue bonds of the City (the Previously Issued Parity Bonds ) and any additional parity bonds that may be issued in the future ( Additional Bonds ), are special obligations of the City payable, both as to principal and interest, solely from and secured by a first lien on and pledge of the Pledged Revenues of the System, which include the Net Revenues of the System remaining after the payment of operation and maintenance expenses (see Appendix B Selected Provisions of the Bond Ordinances Pledge ). The Bonds are not a charge upon any other income or revenues of the City and will never constitute an indebtedness or pledge or a lien on the general credit or taxing powers of the City. The Ordinances do not create a lien or mortgage on the System, except the Pledged Revenues, and amounts on deposit in the Reserve Fund established for the benefit of the Parity Obligations (including the Bonds), and any judgment against the City may not be enforced by levy and execution against any property owned by the City. As additional security, the Reserve Fund will be funded over a 60-month period from operations of the System in the amount equal to 100% of the average annual debt service requirements (including Amortization Installments) of the outstanding Previously Issued Parity Bonds, the Bonds and any Additional Bonds issued on a parity with the Bonds (see Appendix B - Selected Provisions of the Bond Ordinances Reserve Requirements ). Chapter 1208, Texas Government Code, applies to the issuance of the Bonds and the pledge of the Pledged Revenues, and such pledge is valid, effective, and perfected. Should Texas law be amended at any time while the Bonds are outstanding and unpaid, the result of such amendment being that the pledge of the Pledged Revenues is to be subject to the filing requirements of Chapter 9, Texas Business & Commerce Code, as amended, in order to preserve to the owners the perfection of the security interest in such pledge, the City agrees to take such measures as it determines are reasonable and necessary to enable a filing of a security interest in said pledge to occur. APPLICATION OF SYSTEM REVENUES... Gross Revenues of the System are deposited in the Revenue Fund and are applied first to the payment of all necessary and reasonable expenses of operation and maintenance of the System, including payment of certain contractual obligations of the City with respect to water supply and wastewater treatment (see DEBT INFORMATION Table 12 Operations and Maintenance for Water Supply and Wastewater Treatment ), then to the payment of the amounts required for the Interest and Sinking Fund and the Reserve Fund, in that order, established by the Ordinances. The City Charter requires that all System receipts and revenues be devoted to System purposes and to payment of charges that would be due the City if the Water Utilities Department were not a City-owned public utility. The Ordinance states that excess Pledged Revenues may be used for any lawful purpose not inconsistent with the City Charter (see Appendix B Selected Provisions of the Bond Ordinances Deficiencies; Excess Pledged Revenues ). RATES... The City has covenanted in the Ordinances that it will at all times charge and collect for services rendered by the System rates sufficient to pay all current operating and maintenance expenses of the System, to produce Net Revenues for each fiscal year at 10

11 least equal to 1.25 times the Annual Debt Service requirements on all then outstanding Previously Issued Parity Bonds, the Bonds and Additional Bonds for the fiscal year during which such requirement are scheduled to be the greatest, to pay all other System obligations reasonably anticipated to be paid from gross revenues and to establish and maintain the funds provided for in the Ordinance. The City has further covenanted that, if the System should become legally liable for any other indebtedness, it will fix and maintain rates and collect charges for the services of the System sufficient to discharge such indebtedness. ADDITIONAL BONDS... The City may issue additional revenue obligations payable from the Pledged Revenues which together with the Previously Issued Parity Bonds and the Bonds will be equally and ratably secured by a parity lien on and pledge of the Pledged Revenues of the System, subject, however, to complying with certain conditions in the Ordinances. (See Appendix B Selected Provisions of the Bond Ordinances Additional Bonds for terms and conditions to be satisfied for the issuance of Additional Bonds). OPTIONAL REDEMPTION...TheCityreservestheright,atitsoption,toredeemSeries2015A Bonds having stated maturities on and after October 1, 2026, in whole, or in part in principal amounts of $5,000 or any integral multiple thereof, on October 1, 2025 or on any date thereafter, at the redemption price of par plus accrued interest to the date fixed for redemption. If less than all of the Series 2015A Bonds are to be redeemed and if less than all of a maturity is to be redeemed, the Paying Agent/Registrar will determine by lot the Series 2015A Bonds, or portions thereof, within such maturity to be redeemed; provided, however, that during any period in which ownership of the Series 2015A Bonds is determined only by a book entry at a securities depository (see Book- Entry-Only System, below), if fewer than all of the Series 2015A Bonds of the same maturity are to be redeemed, the particular Series 2015A Bonds will be selected in accordance with arrangements between the City and the securities depository. The Taxable Series 2015B Bonds are not subject to redemption prior to maturity. MANDATORY SINKING FUND REDEMPTION...The Series 2015A Bonds are subject to mandatory redemption in part by lot pursuant to the terms of the Series 2015A Bond Ordinance, on October 1 in each of the years 2038 through 2039, inclusive, with respect to Series 2015A Bonds maturing October 1, 2040, and on October 1 in each of the years 2041 through 2043, inclusive, with respect to Series 2015A Bonds maturing October 1, 2044, in the following years and in the following amounts, at a price equal to the principal amount thereof and accrued and unpaid interest to the date of redemption, without premium: Term Bond due October 1, 2040 (CUSIP # X7) Mandatory Redemption Date Mandatory Redemption Amount October 1, 2038 $ 8,780,000 October 1, ,135,000 October 1, ,510,000 + Final Maturity Term Bond due October 1, 2044 (CUSIP # Y5) Mandatory Redemption Date Mandatory Redemption Amount October 1, 2041 $ 9,950,000 October 1, ,460,000 October 1, ,995,000 October 1, ,560,000 + Final Maturity To the extent, however, that Series 2015A Bonds subject to sinking fund redemption have been previously purchased or called for redemption in part and otherwise than from a sinking fund redemption payment, each annual sinking fund payment for such Series 2015A Bond shall be reduced by the amount obtained by multiplying the principal amount of Series 2015A Bonds so purchased or redeemed by the ratio which each remaining annual sinking fund redemption payment for such Series 2015A Bonds bears to the total remaining sinking fund payments, and by rounding each such payment to the nearest $5,000 integral; provided, that during any period in which ownership of the Series 2015A Bonds is determined only by a book entry at a securities depository for the 11

12 Series 2015A Bonds, the particular Series 2015A Bonds to be called for mandatory redemption shall be selected in accordance with the arrangements between the City and the securities depository. NOTICE OF REDEMPTION...Notlessthan30dayspriortoaredemptiondatefortheSeries2015A Bonds called for redemption, the City will cause (i) a written notice of such redemption to be given by the Paying Agent/Registrar to the registered owner of each Bond or a portion thereof being called for redemption by depositing such notice in the United States mail, first class, postage prepaid, addressed to each such registered owner at the address of such registered owner shown on the Registration Books of the Paying Agent/Registrar and (ii) a notice of such redemption to be published one time in a financial journal or publication of general circulation in the United States of America or the State of Texas carrying as a regular feature notices of municipal bonds called for redemption; provided, however, that the failure to send, mail or receive such notice described in (i) above, or any defect therein or in the sending or mailing thereof, will not affect the validity or effectiveness of the proceedings for the redemption of any Series 2015A Bond, and the publication of notice as described in (ii) above shall be the only notice actually required in connection with or as a prerequisite to the redemption of any Series 2015A Bonds. ANY NOTICE WILL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE SERIES 2015A BONDS CALLED FOR REDEMPTION WILL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE, AND NOTWITHSTANDING THAT ANY SERIES 2015A BOND OR PORTION THEREOF HAS NOT BEEN SURRENDERED FOR PAYMENT, INTEREST ON SUCH BOND OR PORTION THEREOF WILL CEASE TO ACCRUE, EXCEPT AS PROVIDED IN THE NEXT PARAGRAH. With respect to any optional redemption of the Series 2015A Bonds, unless the Paying Agent/Registrar has received funds sufficient to pay the principal and premium, if any, and interest on the Series 2015A Bonds to be redeemed before giving of a notice of redemption, the notice of redemption may state the City may condition redemption on the receipt by Paying Agent/Registrar of such funds on or before the date fixed for the redemption, or on the satisfaction of any other prerequisites set forth in the notice of redemption. If a conditional notice of redemption is given and such prerequisites to redemption and sufficient funds are not received, the notice shall be of no force and effect, the City shall not redeem the Series 2015A Bonds and the Paying Agent/Registrar shall give notice, in the manner in which the notice of redemption was given, that the Series 2015A Bonds have not been redeemed. BOOK-ENTRY-ONLY SYSTEM...This section describes how ownership of the Bonds are to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by The Depository Trust Company, New York, New York ( DTC ), while the Bonds are registered in its nominee name. The information in this section concerning DTC and the Book- Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The City believes the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof. The City cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Bonds, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the United States Securities and Exchange Commission (the SEC ), and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered certificate for each maturity and series of the Bonds will be issued, in the aggregate principal amount of such issue, and will be deposited with DTC. DTC, the world s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations.dtc is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing companies that clear through or maintain a custodial relationship with a Direct Participant, either directlyor indirectly ( Indirect Participants ). Direct Participants and Indirect Participants are collectively referred to as Participants. DTC has a Standard & Poor s rating of AA+. The DTC Rules applicable to its Participants are on file with the SEC. More information about DTC can be found at Purchase of the Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC s records. The ownership interest of each actual purchaser of each Bonds ( Beneficial Owner ) is in turn to be 12

13 recorded on the Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds of such series discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the Paying Agent/Registrar and request that copies of the notices be provided directly to them. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the City as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Principal and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the City or the Paying Agent/Registrar, on the payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC nor its nominee, the Paying Agent/Registrar of each series, or the City, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, principal and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the City or the Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Participants. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the City or the Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, Bonds are required to be printed and delivered. Use of Certain Terms in Other Sections of this Official Statement. In reading this Official Statement, it should be understood that while the Bonds are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners or bondholders should be read to include the person for which the Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, notices that are to be given to registered owners under the Ordinances will be given only to DTC. Information concerning DTC and the Book-Entry-Only System has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by, the City or the Underwriters. Effect of Termination of Book-Entry-Only System. In the event that the Book-Entry-Only System is discontinued by DTC or the use of the Book-Entry-Only System is discontinued by the City, printed Bonds will be issued to the holders and the Bonds will be subject to transfer, exchange and registration provisions as set forth in the Ordinances and summarized under THE BONDS- Transfer, Exchange and Registration below. 13

14 PAYING AGENT/REGISTRAR... The initial Paying Agent/Registrar for the Bonds is U.S. Bank National Association. In each Ordinance, the City retains the right to replace the Paying Agent/Registrar. The City covenants to maintain and provide a Paying Agent/Registrar at all times until the Bonds are duly paid, and any successor Paying Agent/Registrar must be a bank, trust company, financial institution or other entity duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Bonds. Upon any change in the Paying Agent/Registrar for the Bonds, the City agrees to promptly cause a written notice thereof to be sent to each registered owner of the Bonds by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar. If the Paying Agent/Registrar is replaced by the City, the new Paying Agent/Registrar must accept the previous Paying Agent/Registrar s records and act in the same capacity as the previous Paying Agent/Registrar. In the event the Book-Entry-Only System hereinabove described should be discontinued, principal of the Bonds will be payable to the registered owner at maturity or redemption prior to maturity upon presentation at the Dallas, Texas corporate trust office of the Paying Agent/Registrar (the Designated Trust Office ). Interest on the Bonds will be payable by check, dated as of the interest payment date, and mailed by the Paying Agent/Registrar to registered owners as shown on the records of the Paying Agent/Registrar on the Record Date (see Record Date for Interest Payment below), or by such other method, acceptable to the Paying Agent/Registrar, requested by, and at the risk and expense of, the registered owner. If the date for the payment of the principal of or interest on the Bonds is a Saturday, Sunday, legal holiday, or day on which banking institutions in the city where the Paying Agent/Registrar is located are authorized by law or executive order to close, then the date for such payment will be the next succeeding day which is not such a Saturday, Sunday, legal holiday, or day on which banking institutions are authorized to close; and payment on such date shall have the same force and effect as if made on the original date payment was due. TRANSFER,EXCHANGE AND REGISTRATION... In the event the Book-Entry-Only System should be discontinued, the Bonds may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender to the Paying Agent/Registrar and such transfer or exchange shall be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. Bonds may be assigned by the execution of an assignment form on the Bonds or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. New Bonds will be delivered by the Paying Agent/Registrar, in lieu of the Bonds being transferred or exchanged, at the Designated Trust Office of the Paying Agent/Registrar,or sent byunited States mail,first class,postage prepaid, to the new registered owner or his designee. To the extent possible, new Bonds issued in an exchange or transfer of Bonds will be delivered to the registered owner or assignee of the registered owner in not more than three business days after the receipt of the Bonds to be canceled, and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Bonds registered and delivered in an exchange or transfer shall be in any integral multiple of $5,000 for any one maturity and series and for a like aggregate designated amount and series as the Bonds surrendered for exchange or transfer. See "THE BONDS -Book-Entry-Only System" herein for a description of the system to be utilized initially in regard to ownership and transferability of the Bonds. Neither the City nor the Paying Agent/Registrar shall be required to transfer or exchange any Series 2015A Bond called for redemption, in whole or in part, within 45 days of the date fixed for redemption; provided, however, such limitation of transfer shall not be applicable to an exchange by the registered owner of the uncalled balance of the Series 2015A Bonds. RECORD DATE FOR INTEREST PAYMENT... The record date ( Record Date ) for the interest payable on the Bonds on any interest payment date means the close of business on the 15th day of the preceding month. In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a Special Record Date ) will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the City. Notice of the Special Record Date and of the scheduled payment date of the past due interest ( Special Payment Date, which must be 15 days after the Special Record Date) will be sent at least five business days prior to the Special Record Date by United States mail, first class, postage prepaid, to the address of each registered owner of a Bond appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 14

15 SOURCES AND USES OF FUNDS...Thesourcesandusesoffunds, including Bond proceeds and a contribution from the City, if necessary, shall be as follows: Taxable Sources Series 2015A Series 2015B Par Amount of Bonds $ 453,630, $ 150,630, Reoffering Premium 69,062, City Contribution 6,471, ,965, Total Sources of Funds $ 529,164, $ 153,595, Uses Deposit to Escrow Fund for the Refunded Bonds $ 310,844, $ 153,154, Deposit to the Note Payment Funds for the Refunded Notes 216,575, Underwriters' Discount 1,740, , Rounding Amount 4, , Total Uses of Funds $ 529,164, $ 153,595, DEFEASANCE...TheOrdinancesprovidethattheCitymaydischargeitsobligationstotheregisteredownersofanyorallofthe Bonds to pay principal, interest and redemption price thereon in any manner permitted by current law. Under current State law, such discharge may be accomplished either (i) by depositing with the Comptroller of Public Accounts of the State a sum of money equal to the principal of, premium, if any, and all interest to accrue on the Bonds to maturity or redemption or (ii) by depositing with any place of payment (paying agent) for obligations of the City payable from revenues or from ad valorem taxes or both, amounts sufficient to provide for the payment and/or redemption of the Bonds; provided that such deposits may be invested and reinvested only in direct obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America. The foregoing obligations may be in book entry form, and shall mature and/or bear interest payable at such times and in such amounts as will be sufficient to provide for the scheduled payment and/or redemption of the Bonds. Upon such deposit as described above, such Bonds shall no longer be regarded to be outstanding or unpaid. After firm banking and financial arrangements for the discharge and final payment or redemption of the Bonds have been made as described above, all rights of the City to initiate proceedings to call the Bonds for redemption or take any other action amending the terms of the Bonds are extinguished; provided, however, that the right to call the Bonds for redemption is not extinguished if the City: (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Bonds for redemption; (ii) gives notice of the reservation of that right to the owners of the Bonds immediately following the making of the firm banking and financial arrangements; and (iii) directs that notice of the reservation be included in any redemption notices that it authorizes. The Ordinances provide that upon receiving the consent of 51% of the outstanding Previously Issued Parity Bonds, the Bonds and Additional Bonds, defeasance of the Bonds and Additional Bonds may be effected by investing moneys in Defeasance Securities. See THE BONDS Amendments to the Ordinance. BONDHOLDERS REMEDIES...Each Ordinance specifies events of default with respect to the Bonds (see Appendix B Selected Provisions of the Bond Ordinance Default and Remedies ). If the Citydefaults in thepayment of principal,interest,or redemption price on the Bonds when due, or if it fails to make payments into any fund or funds created in the Ordinance, or defaults in the observation or performance of any other covenants, conditions, or obligations set forth in the Ordinance, the registered owners may seek a writ of mandamus to compel City officials to carry out their legally imposed duties with respect to the Bonds if there is no other available remedy at law to compel performance of the Bonds or the Ordinance and the City s obligations are not uncertain or disputed. The issuance of a writ of mandamus is controlled by equitable principles, and with the discretion of the court, but may not be arbitrarily refused. There is no acceleration of maturity of the Bonds in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. Neither Ordinance provides for the appointment of a trustee to represent the interest of the bondholders upon any failure of the City to perform in accordance with the terms of the Ordinance, or upon any other condition and accordingly all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the registered owners. The Texas Supreme Court ruled in Tooke v. City of Mexia 197 S.W.3d 325 (Tex. 2006) that a waiver of sovereign immunity in a contractual dispute must be provided for by statute in clear and unambiguous language. Because it is unclear whether the Texas legislature has effectively waived the City s sovereign immunity from a suit for money damages, bondholders may not be able to bring such a suit against the City for breach of the Bonds or Ordinance covenants. Even if a judgment against the City could be obtained, it could not be enforced by direct levy and execution against the City's property. Further, the registered owners cannot themselves foreclose on property within the City or sell property within the City to enforce the tax lien on taxable property to pay the principal of and interest on the Bonds. 15

16 Furthermore, the City is eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code ( Chapter 9 ). Chapter 9 includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or bondholders of an entity which has sought protection under Chapter 9. Therefore, should the City avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Co-Bond Counsel will note that all opinions relative to the enforceability of the Ordinances and the Bonds are qualified with respect to the customary rights of debtors relative to their creditors and by general principles of equity that permit the exercise of judicial discretion. AMENDMENTS TO THE ORDINANCE... In each Ordinance, under certain circumstances, the City has reserved the right to amend the Ordinance without the consent of any holder of the Bonds (see Appendix B Selected Provisions of the Bond Ordinances Amendment of Ordinance ). By acceptance of the Bonds, each owner of a Bond (i) irrevocably and specifically consents to and approves amendments to the Ordinances and the ordinances governing the issuance of Additional Bonds as described below, (ii) irrevocably appoints the City Manager as its true and lawful attorney-in-fact to evidence an owner s specific consent to and approval of the amendments described below, and (iii) confirms all actions taken by the City Manager as attorney-in-fact for the owners. The amendments are as follows: (1) Amend Section 12(b) of the Ordinances to read: "(b) That money in any Fund established by ordinances authorizing Previously Issued Parity Bonds may, at the option of the City, be invested in Authorized Investments; provided, however, that all such deposits and investments shall have a par value (or market value when less than par) exclusive of accrued interest at all times at least equal to the amount of money credited to such Funds, and shall be made in such manner that the money required to be expended from any Fund will be available at the proper time or times. Money in the Reserve Fund shall not be invested in securities maturing later than the final maturity of the Previously Issued Parity Bonds, the Bonds, and Additional Bonds. Such investments shall be valued in terms of current market value as of the last day of each Year, except that direct obligations of the United States (State and Local Government Series) in book-entry form shall be continuously valued at their par or face principal amount. Such investments shall be sold promptly when necessary to prevent any default in connection with the Previously Issued Parity Bonds, the Bonds or Additional Bonds. As used in this Section, the term "Authorized Investments" shall mean those investments in which the City is now or hereafter authorized by law, including, but not limited to, Chapter 2256, Texas Government Code, and consistent with the City s investment policy adopted and approved from time to time by the City Council pursuant to the provisions of Chapter 2256, Texas Government Code,, to purchase, sell and invest its funds and funds under its control. (2) Amend Section 18 of the Ordinances to read: "(a) That any Previously Issued Parity Bond, Bond or Additional Bond shall be deemed to be paid, retired and no longer outstanding within the meaning of this Ordinance when payment of the principal of, redemption premium, if any, on such bond, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, upon redemption, or otherwise) either (i) shall have been made or caused to be made in accordance with the terms thereof (including the giving of any required notice of redemption), or (ii) shall have been provided for by irrevocably depositing with, or making available to, a paying agent (or escrow agent) therefor, in trust and irrevocably set aside exclusively for such payment, (1) money sufficient to make such payment or (2) Defeasance Securities, as hereinafter defined in this Section, certified by an independent public accounting firm of national reputation to mature as to principal and interest in such amounts and at such times as will insure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation, and expenses of such paying agent pertaining to the bonds with respect to which such deposit is made shall have been paid or the payment thereof provided for to the satisfaction of such paying agent. At such time as a Previously Issued Parity Bond, Bond or Additional Bond shall be deemed to be paid hereunder, as aforesaid, it shall no longer be secured by or entitled to the benefit of this Ordinance or such other ordinance securing such bond or a lien on and pledge of the Pledged Revenues, and shall be entitled to payment solely from such money or Defeasance Securities. (b) That any moneys so deposited with a paying agent may, at the direction of the City, also be invested in Defeasance Securities, maturing in the amounts and times as hereinbefore set forth, and all income from all Defeasance Securities in the hands of the paying agent pursuant to this Section which is not required for the payment of the Previously Issued Parity Bonds, Bonds and Additional Bonds, the redemption premium, if any, and interest thereon, with respect to which such money has been so deposited, shall be remitted to the City. (c) That the City covenants that no deposit will be made or accepted under clause (a)(ii) of this Section and no use will be made of any such deposit which would cause the Previously Issued Parity Bonds, Bonds or any Additional Bonds to be treated as "arbitrage bonds" within the meaning of section 148 of the Code. 16

17 (d) That for the purpose of this Section, the term "Defeasance Securities" shall mean (i) direct obligations of the United States of America, including obligations the principal of and interest on which are unconditionally guaranteed by the United States of America, (ii) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date the City adopts or approves proceedings authorizing the issuance of refunding bonds or, if such defeasance is not in connection with the issuance of refunding bonds, on the date the City provides for the funding of an escrow to effect the defeasance of the Bonds, are rated as to investment quality by a nationally-recognized investment rating firm not less than "AAA" or its equivalent, (iii) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date the City adopts or approves proceedings authorizing the issuance of refunding bonds or, if such defeasance is not in connection with the issuance of refunding bonds, on the date the Board provides for the funding of an escrow to effect the defeasance of the Bonds, are rated as to investment quality by a nationally-recognized investment rating firm not less than "AAA" or its equivalent, or (iv) any other then authorized securities or obligations that may be used to defease obligations such as the Bonds under the then applicable laws of the State of Texas. (e) That notwithstanding any other provisions of this Ordinance, all money or Defeasance Securities set aside and held in trust pursuant to the provisions of this Section for the payment of Previously Issued Parity Bonds, Bonds and Additional Bonds, the redemption premium, if any, and interest thereon, shall be applied to and used for the payment of such Previously Issued Parity Bonds, Bonds and Additional Bonds, the redemption premium, if any, and interest thereon. (f) That in accordance with the provisions of Section , Texas Government Code, the City may call for redemption, at a date earlier than their scheduled maturities, those Bonds which have been defeased to their maturity date. Notwithstanding any other provision of this Ordinance to the contrary, it is hereby provided that any determination not to redeem Bonds defeased under the terms of this Ordinance that is made in conjunction with the payment arrangements specified in clauses (i) or (ii) of subsection (a) above shall not be irrevocable, provided that: (1) in the proceedings providing for such payment arrangements, the City expressly reserves the right to call Bonds so defeased for redemption; (2) the City gives notice of the reservation of that right to the owners of the Bonds so defeased immediately following the making of the payment arrangements; and (3) the City directs that notice of the reservation be included in any redemption notices that it authorizes." (3) Amend Section 20(b) of the Ordinances to read: "(b) The Chief Financial Officer of the City signs a written certificate to the effect that, during either the next preceding Year, or any twelve consecutive calendar month period ending not more than ninety days prior to the date of the then proposed Additional Bonds, the Net Revenues were, in her or his opinion, at least equal to 1.25 times the average annual principal and interest requirements (computed on a fiscal year basis) including Amortization Installments, of all Previously Issued Parity Bonds, the Bonds and Additional Bonds to be outstanding after the issuance of the then proposed Additional Bonds." The amendments described in clauses (1) and (3) will become effective once the City determines that the consent of 51% of the aggregate unpaid principal amount of the Previously Issued Parity Bonds, the Bonds and any Additional Bonds then Outstanding is received. The amendment described in clause (2) will become effective once the City determines that the consent of 51% of the aggregate unpaid principal amount of the Previously Issued Parity Bonds, the Bonds and any Additional Bonds then Outstanding is received, and would apply only to the Bonds and the Taxable Series 2015B Bonds, and any Additional Bonds delivered after the date of delivery of the Bonds and the Taxable Series 2015B Bonds. Upon the delivery of the Bonds and the refunding of the Refunded Bonds, the Bonds will comprise 28.7% of the aggregate principal amount of the Previously Issued Parity Bonds and the Bonds outstanding. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 17

18 THE WATER AND WASTEWATER SYSTEM BACKGROUND Dallas Water Utilities Department ( Dallas Water Utilities ) is the department of the City responsible for the administration and management of the System. As of September 30, 2014, the City employed approximately 1,428 persons within Dallas Water Utilities. The primary purposes of Dallas Water Utilities are to obtain, store, purify and distribute water to its customers, and to collect wastewater from its customers, treat it, and dispose of it, in accordance with drinking water standards and effluent guidelines and limitations established by the Texas Commission on Environmental Quality ( TCEQ ) and the United States Environmental Protection Agency ( USEPA ). The TCEQ is the successor agency to the Texas Natural Resource Conservation Commission; references to the TCEQ in this official statement are intended to include agencies whose duties and responsibilities the TCEQ has assumed under State law. The fundamental legal document on which the governance of the City rests is its City Charter. In a provision directly relevant to Dallas Water Utilities, the City Charter states in Chapter XI, Section 14 that all water and wastewater services must be paid for by rate schedules as approved by the city council and such state authority as may be required. The City Charter also states that all receipts and revenues from the water utilities department constitute a separate and sacred fund, which may never be diverted or drawn upon for any purposes other than provision of water and wastewater services and payment of an amount equal to ad valorem taxes and other charges that would be due the city if the water utilities department were not a city-owned public utility (see Water and Wastewater Service Rates described herein). State law provides that notwithstanding any municipal charter provision, a municipality may transfer to the municipality s general fund and may use, for general or special purposes, revenue of any municipally-owned utility system in the amount and to the extent authorized in an ordinance providing for and securing payment of utility system revenue bonds (collectively, the Bond Ordinances ). However, the Bond Ordinances state that excess Pledged Revenues (which consist of Net Revenues and any additional funds that in the future may be pledged to obligations issued or incurred by the System payable from Pledged Revenues) may be used for any lawful purpose not inconsistent with the City Charter and, therefore, prevents any transfer of excess Pledged Revenues from the Dallas Water Utilities to the general fund or any special funds of the City, except to the extent permitted by the City Charter. MANAGEMENT Management officials of Dallas Water Utilities provide departmental administration within the framework of the City s council-manager form of government. Subject to the direction and supervision of the Office of the City Manager, the Director of Water Utilities is charged with management of the System. WATER SUPPLY Summary of Present Supply Sources... Water supply is now available to Dallas Water Utilities from six surface water impoundments, and from water in the Elm Fork of the Trinity River, as further described herein. Additionally, one other surface water impoundment, Lake Palestine, is in the process of being connected to the City s water treatment and distribution system. All of the sources are located in north central and east Texas. The following table contains data as to annual diversion rights permitted to the City and dependable yield of each source to the City, expressed in million gallons per day (MGD). Dependable yield is an estimate of average daily supply reliably available during a period of extreme drought corresponding to the most severe drought on record in each reservoir s drainage area. The source of the dependable yields data shown below is the Dallas 2014 Long Range Water Supply Plan to 2070 and Beyond, described below under Adequacy of Water Supply. Estimates shown are for the Fiscal Year ending September 30, Water Supply Diversion Rights Dependable Yield to Dallas Source of Dallas Available Connected Lake Grapevine 76 MGD 7 MGD 7 MGD Elm Fork System (1) 1,037 MGD 171 MGD 171 MGD Lake Ray Hubbard (2) 80 MGD 54 MGD 54 MGD Lake Tawakoni 170 MGD 164 MGD 164 MGD Lake Fork (3) 118 MGD 107 MGD 36 MGD Lake Palestine (4) 102 MGD 102 MGD 0MGD Total 1,583 MGD 605 MGD 432 MGD (1) Elm Fork System includes Lake Lewisville, Lake Ray Roberts and Elm Fork of the Trinity River run of the river flows. (2) In addition to the Connected Dependable Yield of Lake Ray Hubbard, Dallas has a temporary water rights permit for an additional 44 MGD. The temporary water rights permit provides for operational efficiency and expires upon the issuance of Lake Ray Hubbard Permit Amendment I. (3) Lake Fork was connected to the System in 2009; additional transmission capacity is planned for 2020 to maximize the yield for Lake Fork and Lake Tawakoni. (4) Connection to System not anticipated to occur prior to Water supply from the six reservoirs presently connected to the System is adequate for current needs. Plans are proceeding on schedule to add additional transmission capacity for Lake Tawakoni and Lake Fork and to build a pipeline from Lake Palestine (see THE WATER AND WASTEWATER SYSTEM Water Supply Lake Fork and Water Supply Lake Palestine below). Usage of water supply is ordinarily limited only by the capacity of water treatment plants and the water distribution system. Lakes Grapevine, Lewisville, and Ray Roberts are owned by the United States and are administered by the U.S. Army Corps of Engineers 18

19 (the Corps of Engineers ) for several purposes, including water supply. The estimated effects of reservoir sedimentation are included in dependable yields shown above. Lake Grapevine... Lake Grapevine is a Corps of Engineers project built in the mid-1950s in which the City, Dallas County Park Cities Municipal Utility District ( Park Cities MUD ), and the City of Grapevine are authorized to store, divert and use 85,000, 50,000 and 26,150 acre-feet per year of water rights, respectively. Lake Grapevine has a total dependable annual yield of only approximately 23,000 acre-feet per year of water, meaning that, during times of severe drought, the reservoir can only be counted on to produce approximately 23,000 acre-feet per year of water. Annual operations and maintenance costs are paid to the Corps of Engineers and were approximately $170,000 in the fiscal year ended September 30, During the 1990s, several proceedings (judicial and administrative) concerning Lake Grapevine and the water rights of the City in the Elm Fork of the Trinity River were pursued by the Park Cities MUD. As described below, a settlement concerning these matters was reached in A water use permit was granted to the City by the TCEQ in A settlement agreement involving TCEQ, the City, and the Park Cities MUD was reached in 2001 regarding the permit. Action by the TCEQ issuing orders to give effect to the settlement by the City, Park Cities MUD, the City of Grapevine and the Executive Director of the TCEQ was taken in the Fall, The settlement resolved all issues associated with Lake Grapevine reservoir operations, storage, diversion and use of water from Lake Grapevine, the permit, and protection of senior water rights of the City and the Park Cities MUD to Lake Grapevine water. There has been no addition litigation regarding this permit since the 2001 settlement was reached. Lake Lewisville... Lake Lewisville was completed by the Corps of Engineers in It is located on the Trinity River s Elm Fork northwest of the City and northeast of Lake Grapevine, which is nearby. Lake Lewisville incorporates the former Lake Dallas, which was built in the late 1920s at a cost of approximately $4.6 million. The City retains reversion rights to land formerly owned by the City as a part of Lake Dallas. Contract terms provide that such land will again become property of the City when no longer used by the United States for flood control and allied purposes. Including the cost of Lake Dallas and amounts paid for the right to use of 88.9% of the conservation storage of Lake Lewisville, the cost of this supply source to the City was approximately $8.7 million. Annual operations and maintenance costs are paid to the Corps of Engineers and were approximately $453,000 in the fiscal year ended September 30, These payments constitute current operation and maintenance expenses of the System. The City s water permit for this lake was obtained in The City of Denton holds rights to use of the remaining 11.1% of storage in Lake Lewisville. Delivery of untreated water to the vicinity of the City s purification plants is achieved in a manner similar to that used for Lake Grapevine, through release of water as needed into the Trinity River. The Corps of Engineers operates Lake Lewisville as part of the Elm Fork System with Lake Ray Roberts and the Elm Fork of the Trinity River run of the river flows. The Cities of Irving ( Irving ) and Dallas adopted the Water Treatment Services Contract on January 8, This agreement allowed Irving to store 9,700 acre feet of Lake Chapman water in Lake Lewisville and for Dallas to treat Irving s water at the Elm Fork Water Treatment Plant. The effective date of the Water Treatment Services Contract and the Wholesale Treated Water Contract with Irving is June 30, Both contract terms are for thirty years. The implementation of this contract allows for additional water supply of 39.5 MGD to Dallas Water Utilities System for future sales to other customers. Lake Ray Roberts... On September 16, 1980, the Cities of Dallas and Denton entered into agreements with the United States for construction of Lake Ray Roberts by the Corps of Engineers. Under permits granted by the Texas Water Commission in June 1976, the City shares this supply source and the costs thereof with the City of Denton on a basis of 74% and 26%, respectively. The U.S. Congress in 1965 authorized the Corps of Engineers to construct the reservoir for water supply and recreation. In June 1987, the gates of the dam were closed, initiating the filling of the reservoir. The reservoir was filled by May The Corps of Engineers operates Lake Ray Roberts as part of the Elm Fork System with Lake Lewisville and the Elm Fork of the Trinity River run of the river flows. Lake Ray Roberts is located on the Elm Fork of the Trinity River north of the City of Denton and just north of Lake Lewisville. Portions of the reservoir extend into Denton, Grayson and Cooke Counties. No major transmission facilities are required to transport water from the reservoir to existing treatment plants. The location of Lake Ray Roberts is upstream from the treatment plants and this provides natural gravity flow to the plants, as is the case for Lakes Lewisville and Grapevine. Construction costs, including interest during construction, resulted in a total Dallas share of construction costs for water supply and recreation of approximately $198 million. The City funded its share of the construction costs through the issuance of the Series 1998 Bonds and the Series 1999 Bonds. The City must pay its share of annual operating costs, which are treated as current operation and maintenance costs of the System, and which were approximately $378,000 in the fiscal year ended September 30, Lake Ray Hubbard... The City constructed, owns, operates and has available for its use 100% of the permitted water supply from Lake Ray Hubbard. Pumpage of water to nearby treatment facilities began in the summer of Reservoir cost was approximately $38 million, a major part of which was for land acquisition and for relocation of highways, railroads and other facilities. Lake Ray Hubbard is located in the Dallas city limits (partially in Dallas County) on the East Fork of the Trinity River. A 1959 water permit applies to the reservoir and its use, and also permits (under limited conditions) storage and usage of water pumped by pipeline from Lake Tawakoni. 19

20 Lake Tawakoni... Lakes Grapevine, Lewisville, Ray Roberts and Ray Hubbard are in the Trinity River Basin, as are the City and all of its present water and wastewater customers. Lake Tawakoni, one of the two reservoirs located in the Sabine River Basin, is approximately 50 miles east of the City on the Sabine River, another drainage area in the State. Lake Tawakoni was constructed jointly by the City and the Sabine River Authority of Texas (the Authority ), at a cost to the City of approximately $17.7 million. By contractual agreement with the Authority, the City has rights to use 80% of the available water in the reservoir. The agreement also states that the City will pay 80% of reservoir operation and maintenance expenses to the Authority. Such payments to the Authority were approximately $3,143,000 in the fiscal year ended September 30, 2014, and constitute current operation and maintenance expenses of the System. The first significant pumpage of water to the City treatment facilities occurred early in Two water transmission pipelines, measuring 72 inches and 84 inches in diameter and having a combined capacity of 250 MGD, and associated pumping and interim storage facilities, allow full utilization of the City s permitted water supply from Lake Tawakoni. These transmission pipelines and associated facilities transport untreated water to the East Side Treatment Plant, which also receives untreated water from Lake Ray Hubbard. Based on information received from the Authority, other principal users of water from Lake Tawakoni (from the portion of reservoir supply not applicable to the City water rights) include the Commerce Water District and the Cities of Greenville, Wills Point, Emory, West Tawakoni, Point and Cash, and the North Texas Municipal Water District. Lake Fork... Lake Fork is owned and operated by the Authority and is on Lake Fork Creek, a tributary of the Sabine River. Lake Fork is located in Wood, Hopkins and Rains Counties, approximately 70 miles east of the City. Construction of the reservoir began in June 1975 and the gates of the dam were closed to begin impoundment in February Lake Fork was constructed under a contract between the Authority and Texas Utilities Generating Company (referred to herein as Luminant ). In 1980, Luminant approached the City concerning assumption of its contract and water rights in Lake Fork. A feasibility study was conducted by the City s long range water supply consultant (URS/Forrest and Cotton, Inc.), which concluded that the cost of obtaining water from Lake Fork was the most reasonable of all potential supply sources. Following the findings of the study, the City entered into negotiations with the Authority and Luminant for the purchase of water rights. A contract conveying Luminant s interest in the project to the City became effective October 1, The cost of the City s share of Lake Fork water supply rights was approximately $117.0 million. Financial obligations for the City s share were fully paid as of December The Texas Department of Water Resources issued an amended water permit in August 1983 confirming the transaction. The City now has a contract with the Authority for 74% of the water available from Lake Fork. The Lake Fork contract and the water rights described therein provide to the City the right to use 118 MGD for water supply of which 107 MGD may be used in the Trinity River Basin, in which the City is located. Luminant has exercised its right under the Lake Fork contract to purchase 11 MGD of the 118 MGD. The City is required to pay the Authority for a pro rata share of the operation and maintenance costs associated with Lake Fork, which was approximately $3,332,000 in the fiscal year ended September 30, The compensation amount owed to the Authority for the renewal of the Lake Fork contract was to be mutually negotiated with the Authority prior to the year 2014 pursuant to the terms of the contract. Negotiation attempts with the Authority have failed. In October 2014, the Authority unilaterally established a rate which would require the City to pay approximately an additional $24 million annually for the water to which it is entitled. The City has challenged the rate by filing petitions with the Public Utilities Commission of Texas (the PUC ) and district courts in Travis and Orange counties in Texas. The City has requested the PUC to establish interim water rates while this dispute remains pending. The PUC has ordered an administrative law judge to consider setting an interim rate while this dispute is pending.to date, the Authority has not produced any documents showing that it has a need for the additional revenues that it seeks or how it will spend the additional revenues. Water transmission facilities from Lake Fork to existing City facilities at Lake Tawakoni, which is located 20 miles west of Lake Fork, were completed in Additional transmission capacity from Lake Tawakoni to Dallas treatment facilities are planned for 2020 to maximize the yield of Lake Fork and Lake Tawakoni. Lake Palestine... Lake Palestine, located approximately 90 miles southeast of the City, is owned and operated by the Upper Neches River Municipal Water Authority ( Upper Neches ). Blackburn Crossing Dam, which impounds Lake Palestine, was completed in In 1972, the City acquired rights to use of 53.73% of the annual dependable yield of the reservoir through a contract with Upper Neches. For such rights, the City made payments to Upper Neches equal to a portion of the principal and interest requirements on Upper Neches previously issued bonds to develop Lake Palestine. The cost of the City s share of Lake Palestine water supply rights was approximately $10.9 million. The City is also required to pay Upper Neches the amounts required annually for the operation and maintenance of Lake Palestine, less recreation costs and other credits including receipts from water sales and earnings on certain funds of Upper Neches. The payments of the City with respect to such operation and maintenance were approximately $522,000 for the fiscal year ended September 30, Water rights in Lake Palestine are held by the City to meet future needs of its customers. Integrated Pipeline Project Water transmission and other facilities will be needed when service from this supply source is begun by Dallas Water Utilities. The City has contracted with the Tarrant Regional Water District ( TRWD ) to design and build a transmission line that will connect Lake Palestine to the System as well as interconnecting TRWD s Cedar Creek and Richland Chambers reservoir with Lake Palestine and the System. The TRWD contracts relate to an Integrated Pipeline Project, which are 20

21 expected to produce significant savings and efficiencies in capital construction and operation and maintenance costs for both the City and TRWD. In addition, the TRWD contracts are expected to enhance regional cooperation, including water supply reliability and water sharing between the two entities. Based on current water use projection, the City does not anticipate the need to make this supply available prior to the year The payments to be made by the City to TRWD under the TRWD contracts, including payments made by the City that will be used by TRWD to pay debt service on the obligations issued by TRWD to finance the components of the Integrated Pipeline Project for use by the City, will be treated as operation and maintenance expenses of the City in calculating Net Revenues for the City s revenue bond coverage requirements under the Bond Ordinance. The TRWD contracts include a Financing Agreement and a Delivery Contract. The Financing Agreement establishes that TRWD will own, operate and finance the transmission facilities and that Dallas will own Reserved Capacity Rights of 150 MGD and will pay its share of the design and construction based on Reserved Capacity Rights. Principal and interest on the obligations issued by TRWD are secured by and payable solely from payments to be received by TRWD from the City to the extent required and provided in the Financing Agreement. The obligations issued by TRWD do not constitute a debt or pledge of the faith and credit of the City and accordingly have not been reported in the accompanying financial statements; however, for accounting purposes, the obligation of the City under the Financing Agreement is treated as a liability of the City to the extent that such obligations are for the payment of bonds issued to fund the City s share of the costs for the Project. The City has also capitalized the development of an intangible asset, Pipeline Reserved Capacity Rights for the actual Project costs incurred by TRWD. The unspent proceeds held by TRWD for future construction costs have been recorded in Other Noncurrent Assets Future Pipeline Reserved Capacity Rights. The balance of the obligation for the Financing Agreement was $333,840,000 at September 30, The Delivery Contract establishes the cost allocation of operation and maintenance costs and the operation guidelines for the transmission system. The City s currently estimated share of the total capital cost of the Integrated Pipeline Project is $832 million. As of the date of this Official Statement, $334,065,000 of TRWD Bonds have been issued, with $329,000,000 currently outstanding. For the fiscal year ending September 30, 2014, the total amount paid on the outstanding revenue bonds was $14,072,987. It is anticipated that TRWD would issue additional bonds (the TRWD Bonds ) over a 10 to 15 year period to pay the total capital cost of the Integrated Pipeline Project. It is anticipated that water rate increases would be presented to the City Council for approval as necessary to pay for the City s share of debt service on the TRWD Bonds and operating expense of the Integrated Pipeline Project. All such payments by the City will constitute operating expenses of the System for purposes of calculating Net Revenues for the City s revenue bond coverage requirements. For further discussion of the Integrated Pipeline Project and the System s obligations for repayment of its share of TRWD Bonds issued for such project, as of September 30, 2013, see APPENDIX C Note 5 herein. RECYCLED WATER In addition to the City s water supply from its surface water impoundments and from the Elm Fork of the Trinity River, the City has State issued water rights for the diversion and use of its recycled wastewater return flows. The recycled Water Permit allows for the use of up to 221 MGD limited only by the actual discharge from Dallas Central and Southside Wastewater Treatment Plants, the City of Lewisville s Wastewater Treatment Plant and the Town of Flower Mound Wastewater Treatment Plant and instream flow requirements. In 2008, the City entered into a contract with North Texas Municipal Water District ( NTMWD ) for the exchange of NTMWD s permitted return flows in Lake Ray Hubbard and the Elm Fork of the Trinity River for an equivalent volume of Dallas permitted return flows from Dallas Central and Southside wastewater treatment plants. This exchange will provide Dallas with access to recycled water in Lake Ray Hubbard and Lake Lewisville with a significantly reduced transmission facilities and operation and maintenance costs. ADEQUACY OF WATER SUPPLY... Water supply from each of the seven reservoirs described above is limited in time only by reservoir life. Ongoing dam maintenance and measured sedimentary rates of these reservoirs indicates a useful life of over one hundred years. The dependable yield available to Dallas Water Utilities from the seven reservoirs described above is estimated to be adequate until about the year This projection assumes expected increases in customer demand throughout the utility s regional service area. Additional transmission, treatment and other facilities will be required before that time to fully utilize the available supply. The City Council has approved funding for Dallas Water Utilities to explore options for the development of future water supply sources for the City. Senate Bill 1, which requires statewide water planning, was signed into law in June This bill set up a state-wide initiative to identify future water needs for the State. The State was divided into 16 regional water planning areas. A regional water planning group ( RWPG ) was established for each of the 16 regions. The RWPG is composed of members that represent one of 12 interest categories (i.e., public, counties, municipalities, industries, agriculture, environment, small business, electric generating utilities, river authorities, water districts, water utilities and groundwater management areas). The RWPG of each region is required to project population and water demands, evaluate current water supplies, compare current supply to projected demand and identify and recommend water management strategies to meet water supply shortages. The City is in Region C, and has a representative who presently serves as chair on the Region C Group. The Region C Group is required to submit its Regional Water Plan every five years, the first plan having been submitted in January Every five years upon receiving each of the 16 regional water plans the State reviews and approves the plans and consolidates them into a State Water Plan. The Region C Group submitted its Regional Water Plan to the State in January The State compiled the Regional Plans into a State Water Plan dated January The Region C Group is currently preparing the next Regional Water Plan to be submitted to the State in

22 The City s Long Range Water Supply Plan ( LRWSP ) was updated in 2014 on behalf of the City by the engineering consulting firm of HDR, Inc. to meet future water demands for Dallas and its customer cities through the year 2070 and beyond. The LRWSP identified recommended and alternate water management strategies and infrastructure recommendations. The City Council enacted an expanded Water Conservation Program effective October 1, During the first three years, the program focused primarily on outdoor water conservation practices. In 2004, the City embarked on a more holistic approach to encouraging water conservation designed to reduce total water consumption without reducing the benefit of the water used. This long-term strategic approach is designed to: reduce the consumption of water; reduce the loss and waste of water; improve the efficiency in the use of water; postpone the construction of new water system improvements; serve as an alternative water supply source to reduce future needs and; comply with statewide legislative criteria and new initiatives. The City currently is updating its Water Conservation Strategic Plan that defined water conservation goals and recommended strategies for the next five years. The Water Conservation Strategic Plan is scheduled to be complete in Summer WATER PURIFICATION AND DISTRIBUTION Water purification which meets or surpasses all present State and federal quality standards is now accomplished by Dallas Water Utilities at its three treatment plants. The current capacity of purification facilities is as follows, measured in million gallons per day (MGD): Water Treatment Plant East Side Elm Fork Bachman Total Treatment Capacity 440 MGD 310 MGD 150 MGD 900 MGD Distribution storage capacity and treated water pumping stations are adequate to meet delivery of service for maximum day, maximum hour and fire protection requirements within the City. Currently, expansion at the East Side plant is under construction. These improvements will add an additional 100 MGD treatment capacity. Additional distribution system capacity will result from facilities currently under construction or scheduled for the near future in all functional areas, including major transmission, ground and elevated storage, and distribution pumping. Based upon system demand of Dallas and customer cities, current treatment and distribution capacity is estimated to be adequate to meet maximum daily requirements. In 2009, Dallas Water Utilities updated the City s Water Distribution System Master Plan, which consists of historic and future demand allocations, a facilities inventory, a hydraulic model of the distribution system, and identifies system improvements for the distribution system through the year At September 30, 2014, there were approximately 4,922 miles of water mains in service. The federal Safe Drinking Water Act, as amended, provides for establishment of potable water standards in the United States. While the quality of water treated in the System presently meets all federal standards, such standards are subject to revision which may in turn result in the need to construct additional treatment facilities or modify existing treatment processes. PERFORMANCE STUDIES... The City has two separate studies of performance of operations of Dallas Water Utilities. One is an audit performed by the Office of the City Auditor, dated December 27, 2002; the other is an efficiency study of Dallas Water Utilities performed by the engineering firm Black & Veatch, which was released on January 10, The studies confirm the need for Dallas Water Utilities to continue to invest more capital in upgrading existing infrastructure that serves the customers of Dallas Water Utilities. The current Distribution System Master Plan for Dallas Water Utilities anticipates expending funds to gradually upgrade the existing infrastructure serving customers of Dallas Water Utilities. Implementing the recommendations made in the reports may result in an increase in the level of capital improvements to the System above that currently anticipated in the Master Plan. Other management and operation issues have been noted in the studies, including the need to address a trend of an increase in unaccounted for water losses within the System. In order to implement some or all of the recommendations noted in the studies, Dallas Water Utilities has sought and received from the City Council approval of eleven retail rate increases through the fiscal year ended September 30, 2014, for water and sewer services. In the City budget approved September 17, 2014, for the fiscal year beginning October 1, 2014, the City Council approved a 3.5% retail rate increase (see THE WATER AND WASTEWATER SYSTEM Water and Wastewater Service Rates ). The City Council previously implemented a 4.5% retail rate increase that took effect October 1, 2013 (see THE WATER AND WASTEWATER SYSTEM Water and Wastewater Service Rates ). WATER SERVICE CUSTOMERS... Dallas Water Utilities provides treated water to its customers within the City on a retail basis. Treated and untreated water is provided on a wholesale basis to other cities and governmental entities outside of Dallas. Retail service is characterized by a water distribution system, by a customer service system (including service billings to final consumers) and by provision of water facilities for fire protection. Wholesale water customers provide their own distribution, customer service, and fire protection systems for the ultimate benefit of consumers. 22

23 TABLE 1 WHOLESALE TREATED WATER CUSTOMERS Treated water is now supplied on a wholesale basis to the following cities and authorities under contracts expiring in the calendar years indicated. Entity Year Entity Year Addison 2042 Flower Mound 2017 Carrollton 2043 Glenn Heights 2022 Cedar Hill 2044 Grand Prairie 2042 Cockrell Hill 2044 Hutchins 2042 Combine WSC 2035 Irving 2033 Coppell 2017 Lancaster 2041 Balch Springs 2015 Lewisville 2016 Dallas/Fort Worth International Airport 2015 Ovilla 2035 DeSoto 2043 Red Oak 2033 Duncanville 2044 Seagoville 2043 Ellis County WCID# The Colony 2040 Farmers Branch 2040 Dallas and its wholesale treated water customers negotiated and reached consensus on a thirty-year Memorandum of Agreement for wholesale treated water rate-setting methodology. The new Memorandum of Agreement was approved by the City Council on May 12, Wholesale rates for treated water service to all customer cities and authorities are determined per the provisions of the new Memorandum of Agreement. As of August 13, 2003, the City Council approved individual contracts between Dallas Water Utilities and the City of Red Oak, Rockett SUD and Ellis County WCID#1 for wholesale supply of treated water. The City of Red Oak began taking water in Spring, The contract with Rockett SUD was terminated in Ellis County WCID#1 is not yet connected to Dallas Water System. These contracts will expire in the year In addition to a Wholesale Treated Water Contract, the Cities of Irving and Dallas adopted the Water Treatment Services Contract on January 8, This agreement allows Irving to store 9,700 acre feet of its Lake Chapman water in Lake Lewisville and for Dallas to treat Irving s water at the Elm Fork Water Treatment Plant. The effective date of the Water Treatment Services Contract and the Wholesale Treated Water Contract with Irving is June 30, Both contract terms are for thirty years (see The Water and Wastewater System - Water Supply - Lake Lewisville ). Dallas has a designated planning and service area in the 2014 update to the LRWSP. In accordance with the plans, Dallas is planning for the long range needs of all its existing customers and anticipate renewal of all existing contracts. Untreated water from existing reservoirs is supplied to the City of Denton, the City of Lewisville, the Upper Trinity Regional Water District, and the City of Grapevine under contracts extending to the years 2015, 2016, 2022 and 2030, respectively. On April 24, 2013, the City Council authorized a three-year untreated water contract with the NTMWD to: (1) purchase up to 60 MGD of untreated water from Dallas Lake Tawakoni, Lake Fork and/or Lake Ray Hubbard supplies; and (2) transport water supply owned by NTMWD from Lake Fork to Lake Tawakoni. Service to wholesale treated water customers comprised approximately 39 percent of total treated water sales volume to pumpage and approximately 21 percent of billed revenues for treated water service in the fiscal year ended September 30, Some cities and governmental entities, in addition to those listed above, may request wholesale water service. In the LRWSP, the wholesale service planning area was reduced in Collin County to the north, while simultaneously expanded into portions of Ellis County to the south. The current wholesale service planning area includes the corporate limits of all customer cities connected to the System in In addition to one suburban city that receives water from another wholesale supplier, the wholesale service area includes most of Dallas County and portions of the contiguous counties. Each wholesale customer pays initial costs required to extend service to their area, and other continuing costs of service. The City Council adopted Conditions for New Treated Water Customers in December

24 TABLE 2-TREATED WATER PUMPAGE (MILLION GALLONS) Fiscal Peak Average Year Day Day Total , , , , ,792 TABLE 3 TREATED WATER CONSUMPTION BY CUSTOMER CLASS (MILLION GALLONS) Retail Fiscal Year Ended September 30, Residential 24,699 26,604 27,033 29,860 25,543 General Service 34,176 35,652 35,966 37,446 34,552 Optional General Service (1) 4,845 4,771 5,149 5,363 5,222 Total Retail 63,720 67,027 68,148 72,669 65,317 Wholesale 52,573 55,741 54,438 58,772 54,601 Total 116, , , , ,918 (1) Customers consistently using one million gallons or more monthly. TABLE 4A TEN LARGEST WHOLESALE TREATED WATER CUSTOMERS (MILLION GALLONS) Fiscal Year 2014 Water Wholesale City of Carrollton Consumption 6,805 City of Grand Prairie 6,270 City of Irving (1) 3,219 City of Coppell 3,159 City of Lewisville 3,114 City of Farmers Branch 2,653 City of DeSoto 2,484 City of Cedar Hill 2,038 Town of Flower Mound 1,825 City of Duncanville 1,722 Total 33,289 (1) In addition to the 3, MG treated water provided under the treated water contract, Dallas Water Utilities also treated 10, MG of raw water from Irving s Lake Chapman under the Dallas Water Utilities/Irving treatment services contract. Reflects as billed consumption. 24

25 TABLE 4B TEN LARGEST RETAIL TREATED WATER CUSTOMERS (MILLION GALLONS) Fiscal Year 2014 Water Retail Consumption Texas Instruments Inc 1,832 UT Southwestern M edical Center 487 Niagara Bottling LLC 415 Nestle Water North America 226 Quaker Oats Inc. 216 Dallas County Facilities M anagement 204 Dallas County Health Dept/Pleasant Grove Health Clinic 161 White Wave Food Company 157 Dallas Housing Authority 154 Baylor Health Care System 142 Total Ten Largest Retail Customers 3,994 Other 59,726 Total Retail Treated Water Consumption 63,720 WASTEWATER SYSTEM Dallas Water Utilities provides wastewater services to its customers through a system encompassing approximately 4,020 miles of wastewater collection pipelines, which transport wastewater primarily by gravity flow to two treatment plants. In addition, a small portion of the City s wastewater treatment is obtained under long-term contracts with the Trinity River Authority of Texas ( TRA ) and the City of Garland. The contract with TRA provides that monies received from the City (and other participating cities) for wastewater treatment by TRA shall be considered to be operating and maintenance expenses of the respective cities. Net payments by the City to TRA were approximately $4,744,000 and to the City of Garland were approximately $668,000 for the fiscal year ended September 30, The City s wastewater treatment process is a biological treatment process providing advanced treatment to comply with State and Federal requirements for effluent quality and water pollution control. Wastewater solids generated by the treatment plants are processed for final disposal at the Southside Wastewater Treatment Plant. Solids dewatering facilities, dedicated disposal fields, and a solids only landfill (monofill) provide the capability to dispose of 120 dry tons of solids daily. The only chemicals used are chlorine and sulfur dioxide for disinfection prior to the final effluent discharge; polymers to enhance the solids dewatering process; and oxidizing agents to control odors associated with the wastewater treatment process. The filtrate (water that is pressed out of the sludge) from dewatering is closed with lime and aerated to help remove ammonia in the sidestream treatment. The cost of these chemicals is approximately 6% of wastewater treatment operational costs. The larger of the two wastewater treatment plants operated by Dallas Water Utilities is the Central Wastewater Treatment Plant, which incorporates facilities built in phases in previous years at the same location. The Central Wastewater Treatment Plant has a permitted treatment capacity of 150 MGD. The Southside Wastewater Treatment Plant has a permitted treatment capacity of 110 MGD, resulting in total wastewater system permitted treatment capacity of 260 MGD on an average daily basis. In January 2007, the City entered into a voluntary Sanitary Sewer Outreach Initiative Agreement with TCEQ. This is a 10-year plan to address sanitary sewer overflows. The main initiative under this agreement is to develop and implement corrective action plans to protect public health, the environment, and City-owned sanitary sewer infrastructure. WASTEWATER SERVICE CUSTOMERS Dallas Water Utilities provides wastewater collection and treatment services on a retail basis to customers primarily within the City and on a wholesale basis to eleven customer cities. Wholesale service is characterized by service billings from the City to wholesale customers, who provide their own wastewater collection facilities, under standards established by contract with the City, and their own customer service systems, including service billings to final consumers. Wastewater service charges to retail customers generally apply to volume of water consumption, but for retail residential customers, service rates are based on average water consumption during winter months, or actual water consumption if lower. 25

26 TABLE 5 WHOLESALE WASTEWATER CUSTOMERS Customer cities receiving wholesale wastewater services are principally as follows, with contractual terms of service now extending to calendar years indicated: Addison (portion) 2044 Hutchins 2044 Cockrell Hill 2044 Mesquite (portion) 2036 Dallas County WCID No. 6 (Balch Springs) 2028 Richardson (portion) 2037 Duncanville (portion) 2044 Seagoville 2033 Highland Park 2044 University Park 2044 Wilmer 2044 Wholesale service rates for wastewater services to customer cities are established by rate ordinance of the City Council. Charges to wholesale wastewater customers are based on metered wastewater flows, if technically feasible, or on average water consumption during winter months. All wastewater service customers must comply with the City ordinances applicable to prohibited substances, concentration limits, infiltration/inflow monitoring and control, and payment of equitable excess strength surcharges in addition to normal service rates. Service to wholesale wastewater customers comprised approximately 8 percent of total wastewater volume and approximately 4 percent of billed revenues for wastewater service in the fiscal year ended September 30, TABLE 6 TREATED WASTEWATER FLOW (MILLION GALLONS) Maximum Average Total Fiscal Day Treated Day Treated Treated Year Effluent Effluent Effluent , , , , ,643 COST OF SERVICE STUDY... A rate study was completed in 2014 pursuant to the City s financial criteria for Dallas Water Utilities cost of service studies. Adjustments in wholesale customer service rates based on the study were approved by the City Council on September 17, 2014, to provide for expected costs of service in the fiscal year beginning October 1, WATER AND WASTEWATER SERVICE RATES... The City s water and wastewater system is operated as a self-sustaining municipal enterprise under the terms of the revenue bond ordinances adopted by the City Council and the City Charter. The self-sustaining concept was first given legal effect in the City in Dallas Water Utilities does not contribute to general revenues of the City, other than payments for services rendered and for street rental fees, which are directly comparable to franchise fees paid by privately-owned utilities to the City and a payment in lieu of taxes ( PILOT ), as further discussed below. Since 1993, the City Charter has allowed payment of amounts equal to ad valorem taxes and other charges that would be due the City if the Water Utilities Department were not a city-owned public utility. No additional amounts pursuant to the 1993 Charter amendment were paid or assessed prior to September 30, The Fiscal Year 2008 Budget provided for a partial implementation of a PILOT, not to exceed $6 million. This represents approximately 45% of the maximum allowed. In the fiscal year 2010 budget, the PILOT was fully implemented, payable in the amount of $13.3 million. For the current fiscal year beginning October 1, 2014 with updated Dallas Water Utilities asset values and current ad valorem rates, the PILOT payable amount is $22.0 million. The System is not supported in any way from other City revenue sources, except payments for services rendered. The rates charged wastewater customers are based upon the cost of providing wastewater service, as required by the USEPA. Water and wastewater rates are intended to ensure that revenues are received from each class of customers equivalent to the costs associated with service to each respective customer class. Capital improvement planning includes provision for facilities which are adequate to meet projected customer demand, rehabilitation or replacement of aging facilities and service quality meeting required standards. All service rates, charges and basic service procedures are established by the City Council. 26

27 Retail water and wastewater service rates, as set forth in the following Tables 7 and 8, are effective as of October 1, An average monthly bill of $62.52 is paid for water and wastewater services by a City residential customer with a 5/8 inch meter, average monthly water consumption of 8,300 gallons, and 5,900 gallons winter month average for wastewater charges. The retail rate for treated water and wastewater services consists of a monthly customer charge which applies to each customer without reference to consumption, and a usage charge which depends on the volume of water used (or wastewater discharged). Customers are billed monthly. TABLE 7 RETAIL CUSTOMER CHARGE (AS OF OCTOBER 1, 2014) The monthly customer charge for retail treated water service and wastewater service are fixed amounts based upon meter size. Both water and wastewater charges are shown below to present the total customer charge for combined water and wastewater service. Monthly Retail Customer Charge Water Wastewater Combined 5/8InchMeter $ 4.85 $ 4.45 $ /4 Inch Meter Inch Meter /2 Inch Meter Inch Meter Inch Meter Inch Meter Inch Meter Inch Meter Inch Meter or larger , [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 27

28 TABLE 8 RETAIL USAGE CHARGE (AS OF OCTOBER 1, 2014) Monthly Retail Rate Per 1,000 Gallons Water Wastewater Residential Up to 4,000 Gallons $ 1.80 $ 4.95 (1) 4,001 to 10,000 Gallons (1) 10,001 to 15,000 Gallons (1) Above 15,000 Gallons (1) General Service Up to 10,000 Gallons $ 3.05 $ 3.70 Above 10,000 Gallons Above 10,000 and usage x annual monthly average Wastewater metered separately 3.50 (1) Wastewater rates for residential accounts are applied to average water consumption billed in December, January, February, and March, up to 40,000 gallons per month, or actual water consumption if lower. (2) Fixed amount, not a volume rate. Optional General Service 1st Million Gallons or Less $ (2) 2, $ 3.38 Above 1 Million Gallons (Per 1,000 Gallons) Wastewater metered separately 3.50 The retail usage charge applies in addition to the customer charge shown in Table 7. The usage charge is generally stated as a rate per 1,000 gallons. Both the retail water usage charge and the retail wastewater usage charge are applied to volume of water used, except for that wastewater which is metered separately. Wastewater meters are purchased by general service customers (typically large business customers) when separate wastewater metering is advantageous to them. Retail usage charges are established for three customer classes as set forth above. For residential wastewater customers, the retail usage charge is based upon average water consumption during winter months, or actual water usage for each month if lower. Each of the rates for usage charges and for customer charges is subject to 5% additional charge if not paid when due. In addition to the above rates, a surcharge is applied when a general service customer is found to be discharging waste of excessive strength, based upon concentration (determined by sampling) of biochemical oxygen demand and/or total suspended solids above a level of 250 milligrams per liter. The customer deposit ordinance provides that deposits from new customers are not required upon evidence of satisfactory credit histories. The customer deposit ordinance also provides for the refund of previous deposits to existing customers, if appropriate, upon review of their credit histories. In recent years, approval of rate adjustments, as needed, by the City Council has been received in September, at the same time approval is granted for the operating and capital budgets for the following fiscal year beginning the next succeeding October 1. The fiscal year 2015 City budget was approved on September 17, The City Council approved a 3.5% retail rate increase. The adequacy of rates for both water and wastewater services will continue to be reviewed annually and recommendations will be made for adjustments as needed. Wholesale service rates are established by rate ordinance of the City Council, within the terms of applicable contracts and agreements. The City s policy for review of wholesale rates includes an annual cost of service study, in which wholesale customers participate through a committee of their representatives. A comprehensive annual cost of services methodology review was completed in The present rates for wholesale water and wastewater service, described in Table 9, are based on an annual cost of service study completed in Rates to all wholesale treated water customers are adjusted annually in accordance with the terms of a rate agreement originally reached in August 1979 and revised in May 2010 between the City and customer cities (see Water Service Customers ). 28

29 TABLE 9 WHOLESALE CUSTOMER CHARGES (AS OF OCTOBER 1, 2014) Wholesale rates are as follows, for each type of wholesale service: Treated Water Service: Customers with rate-of-flow controllers: $ per thousand gallons of water used, plus $223,308 annually per million gallons of daily capacity reserved. Customers without rate-of-flow controllers (or if a flat rate is provided by contract): $ per thousand gallons of water used. Untreated Water Service: Customers inside or outside the City: $ per thousand gallons of water used ($ for interruptible service). Wastewater Service: $ per thousand gallons of wastewater discharged. A surcharge is applied for wastewater of excessive strength. CAPITAL IMPROVEMENT PROGRAM The need for and specific nature of capital improvements are dependent upon the characteristics and growth of future customer demand, and upon standards of service quality established primarily by State and federal authorities. Capital improvements to the System have been financed principally through the issuance of Commercial Paper Notes and Revenue Bonds, through application to construction of customer revenues not required for operating expenses and debt service, and through receipt of contributions in aid of construction from customers, developers, and from State and federal grants. A major portion of the capital improvements has been financed on an interim basis through the issuance of commercial paper notes. (See DEBT INFORMATION Commercial Paper Notes Payable ). Capital improvements do not include the Integrated Pipeline Project, the costs of which are treated as an operating expense. New water facilities are so designed that as additional water sources become available, water purification and distribution through the new facilities can be accomplished with a minimum of additional future construction. New wastewater system facilities are also designed to meet additional service requirements at minimal cost. During the three fiscal year period commencing October 1, 2014 and ending September 30, 2017, the City anticipates it will commence water utilities capital improvements totaling approximately $1,062,230,000, including improvements to the water system of approximately $713,590,000 and improvements to the wastewater system of approximately $348,640,000. Current budgeted projections for this three fiscal year period indicate $915,920,000 will be funded from borrowing and $146,310,000 will come from current revenues. The projected water utilities capital improvements would require the City Council to implement annual rate increases, with an outlook toward estimated annual increases of 3 to 6 percent. Estimated rate increases are based upon the costs of the capital improvement program and projected increases in operating expenses, which include the costs associated with the Integrated Pipeline Project (see THE WATER AND WASTEWATER SYSTEM Water Supply Lake Palestine ). No assurances can be given that such rate increases will be implemented or that the projected capital improvements will commence in the manner described above. Further information regarding the System, including the financial statements for the Water Utility Fund (the financial statements are shown in Appendix C), can be obtained from the filings the City has made, with respect to the Prior Encumbered Bonds pursuant to Rule 15c2-12 promulgated by the U.S. Securities and Exchange Commission, with the Municipal Securities Rulemaking Board through its Electronic Municipal Market Access (EMMA) system at The City has not agreed to undertake a more frequent updating of such information than its annual filing obligations under the ordinances authorizing the Prior Encumbered Bonds adopted after July 3, 1995, except with respect to making specified events filings promptly after the occurrence of certain events required pursuant to an undertaking adopted pursuant to Rule 15c

30 DEBT INFORMATION TABLE 10 - WATERWORKS AND SEWER SYSTEM REVENUE BOND REQUIREMENTS (1) FYE Outstanding Previously Issued Parity Bonds Refunded The Bonds Total Debt Service %of Principal 9/30 Principal Interest Total Debt Service Principal Interest Total Principal Interest Total Retired 2015 $ 94,545,000 $ 84,133,976 $ 178,678,976 $ (325,067) $ - $ - $ - $ 94,545,000 $ 83,808,909 $ 178,353, ,825,000 80,399, ,224,153 (19,503,994) 2,850,000 25,290,162 28,140,162 96,675,000 86,185, ,860, ,365,000 76,534, ,899,931 (19,503,994) 3,085,000 24,783,961 27,868,961 98,450,000 81,814, ,264, ,370,000 72,818, ,188,639 (19,503,994) 3,245,000 24,625,711 27,870,711 92,615,000 77,940, ,555, ,540,000 68,853, ,393,085 (19,503,994) 3,410,000 24,459,336 27,869,336 97,950,000 73,808, ,758, % ,860,000 64,567, ,427,912 (35,446,819) 16,070,000 24,162,108 40,232,108 98,610,000 69,603, ,213, ,155,000 60,261, ,416,524 (64,065,831) 45,460,000 23,395,205 68,855,205 97,245,000 65,960, ,205, ,725,000 55,976, ,701,950 (60,149,294) 49,760,000 22,172,153 71,932, ,965,000 62,519, ,484, ,385,000 51,785, ,170,732 (50,578,038) 41,455,000 20,908,545 62,363,545 96,080,000 58,876, ,956, ,855,000 47,836, ,691,913 (47,440,594) 39,765,000 19,466,333 59,231,333 85,375,000 55,107, ,482, % ,000,000 44,439, ,439,805 (47,423,619) 41,640,000 17,578,600 59,218,600 76,725,000 51,509, ,234, ,680,000 41,640, ,320,917 (37,787,541) 33,890,000 15,690,350 49,580,350 65,755,000 48,358, ,113, ,290,000 39,005, ,295,408 (37,769,488) 35,610,000 13,952,850 49,562,850 68,715,000 45,373, ,088, ,060,000 36,222, ,282,337 (26,142,263) 25,510,000 12,424,850 37,934,850 71,815,000 42,259, ,074, ,088,000 33,193, ,281,810 (16,783,663) 17,220,000 11,356,600 28,576,600 75,163,000 38,911, ,074, % ,905,000 30,050,841 93,955,841 (11,787,750) 12,980,000 10,601,600 23,581,600 70,305,000 35,444, ,749, ,015,000 27,311,441 79,326,441 (11,790,250) 13,650,000 9,935,850 23,585,850 58,745,000 32,377,041 91,122, ,480,000 24,851,655 79,331,655 (11,790,375) 14,350,000 9,235,850 23,585,850 61,555,000 29,572,130 91,127, ,630,000 22,235,034 79,865,034 (23,901,750) 27,505,000 8,189,475 35,694,475 65,065,000 26,592,759 91,657, ,465,000 19,395,381 79,860,381 (23,902,500) 28,770,000 6,926,450 35,696,450 68,135,000 23,519,331 91,654, % ,515,000 16,351,303 79,866,303 (23,900,500) 29,940,000 5,752,250 35,692,250 71,275,000 20,383,053 91,658, ,710,000 13,153,653 79,863,653 (23,903,000) 31,165,000 4,530,150 35,695,150 74,555,000 17,100,803 91,655, ,895,000 10,174,144 65,069,144-8,105,000 3,744,750 11,849,750 63,000,000 13,918,894 76,918, ,380,000 7,701,288 53,081,288-8,435,000 3,413,950 11,848,950 53,815,000 11,115,238 64,930, ,375,000 5,638,647 43,013,647-8,780,000 3,069,650 11,849,650 46,155,000 8,708,297 54,863, % ,285,000 3,728,700 43,013,700-9,135,000 2,711,350 11,846,350 48,420,000 6,440,050 54,860, ,610,000 2,088,216 28,698,216-9,510,000 2,338,450 11,848,450 36,120,000 4,426,666 40,546, ,580, ,000 19,542,000-9,950,000 1,899,500 11,849,500 28,530,000 2,861,500 31,391, ,950, ,750 10,198,750-10,460,000 1,389,250 11,849,250 20,410,000 1,638,000 22,048, ,995, ,875 11,847,875 10,995, ,875 11,847, % ,560, ,000 11,849,000 11,560, ,000 11,849, % $ 1,915,538,000 $ 1,041,562,146 $ 2,957,100,146 $ (632,904,314) $ 604,260,000 $ 355,147,164 $ 959,407,164 $ 2,106,323,000 $ 1,177,279,994 $ 3,283,602,994 (1) Numbers may not sum due to rounding. 30

31 OUTSTANDING REVENUE BONDS... All of the City's Waterworks and Sewer System Revenue Bonds ( Revenue Bonds ) currently outstanding and payable from Pledged Revenues of the System result from Revenue Bond issues commencing with the City's Waterworks and Sewer System Revenue Refunding Bonds, Series 1981 (the Series 1981 Bonds ). The City thereafter has issued various series of Revenue Bonds on a parity with the Series 1981 Bonds, in accordance with the terms of the ordinance that authorized the issuance of the Series 1981 Bonds (the Underlying Ordinance ). See Appendix B Selected Provisions of the Bond Ordinance Definitions Previously Issued Parity Bonds for a general description of the Revenue Bonds currently outstanding that were issued on a parity under the terms of the Underlying Ordinance. REVENUE BOND COVERAGE... Authorizing City ordinance under which all Revenue Bonds are issued require a level of Net Revenues for the preceding fiscal year ended September 30, or for a consecutive 12-month period ending within 90 days before the date of the bonds to be issued, equal to at least 1.25 times average annual principal and interest requirements of outstanding and proposed additional Revenue Bonds as a condition for issuance of Additional Bonds ( revenue bond coverage ). The Summary of Net Revenues for Revenue Bond Coverage Cash Basis (Table 15 herein) presents Net Revenues for coverage using cash receipts and operating cash disbursements. In determining revenue bond coverage, Net Revenues do not include nonoperating disbursements, e.g., additions to the utility plant. In addition to the coverage requirement described above, which is a condition necessary for the issuance of additional Revenue Bonds, the authorizing ordinance stipulates that revenue bond coverage must be maintained each year. The latter requirement is effective whether or not Additional Bonds are issued. The level of Net Revenues necessary in each year is 1.25 times the principal and interest requirements of outstanding Revenue Bonds, during the year in which such requirements are scheduled to be the greatest. TABLE 11 HISTORICAL COVERAGE RATIOS (1) The table below presents coverage ratios for ten previous years. The figures shown are revenue bond coverage of average annual principal and interest requirements and of maximum annual principal and interest requirements, for all Revenue Bonds outstanding at September 30 of each year. Net Revenues used to compute the coverage levels for each year presented below are for the fiscal year ended September 30. Year Average Maximum Year Average Maximum x 1.85x x 1.52x x 1.73x x 1.40x x 1.58x x 1.56x x 1.40x x 1.38x x 1.43x x 1.26x (1) Table 14 herein entitled Projected Coverage and Fund Balances indicates projected coverage levels after the present issuance of Bonds, using Net Revenues of the fiscal year ended September 30, [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 31

32 TABLE 12 OPERATIONS AND MAINTENANCE FOR WATER SUPPLY AND WASTEWATER TREATMENT (AMOUNTS IN THOUSANDS) The City has obtained most of its water supply through contractual agreements with surface reservoir operating entities. Also, a small portion of the City's wastewater is treated by the TRA and the City of Garland. In addition, as discussed in this Official Statement in THE WATER AND WASTEWATER SYSTEM Water Supply Lake Palestine, the City s financial obligation to TRWD for the Integrated Pipeline Project is treated as an operating expense. The following table summarizes the monetary effect, as of September 30, 2014, of major agreements for raw water supply and wastewater treatment, and the Integrated Pipeline Project : Operation and Maintenance Expenses Raw Water Supply Contract With 2014 (1) Lake Ray Roberts United States $ 378 Lake Fork Sabine River Authority 3,332 Lake Palestine Upper Neches River 522 M unicipal Water Authority Lake Tawakoni Sabine River Authority 3,143 Lakes Lewisville and Grapevine United States 624 Wastewater Treatment Wastewater Treatment Trinity River Authority 4,744 Wastewater Treatment City of Garland 668 (1) Unaudited. Integrated Pipeline Project Water Transmission Tarrant Regional Water District 14,073 $ 27,484 OTHER CONTRACTS For each agreement listed in Table 12 above, operation and maintenance expenses continue after final payment of capital obligations. Each agreement provides in effect that the City may enjoy its benefits for the useful lives of relevant facilities. Previously existing capital obligations for water supply in Lakes Ray Roberts, Fork, Palestine, Tawakoni, Lewisville, and Grapevine have been fully paid. All payments of operation and maintenance expenses under the contracts listed in Table 12 above are considered as such in computation of revenue bond coverage. Applicable statutory laws and contracts determine the coverage effect of the expenditure requirements of certain contracts. As a result, principal and interest payments to TRA, to the Sabine River Authority under the Lake Fork contract, and to TRWD relating to the Integrated Pipeline Project, are treated as operating expenses. The City is authorized under State law to execute additional water supply and wastewater treatment contracts with public entities which may provide for payments thereunder as operation and maintenance expenses of the System for revenue bond coverage purposes. INTEREST AND SINKING AND RESERVE FUNDS... In accordance with the City Charter, all receipts and revenues of the City's Water Utilities Department are devoted only to purposes relating to the System and its indebtedness and to payment of amounts equal to ad valorem taxes and other charges that would be due the City if the Water Utilities Department were not a city-owned public utility. The City s revenue bond ordinance for the System state, in effect, that all System revenues are pledged, in order of priority, to: (1) necessary expenses of operation and maintenance, (2) current payments of Revenue Bond principal and interest, (3) accumulation of a debt service Reserve Fund, and (4) any other lawful purpose not inconsistent with the City Charter. Under the terms of the Underlying Ordinance, depreciation and any PILOT payments and any other similar payments are not considered expenses of operation and maintenance of the System. For each series of outstanding Revenue Bonds, equal amounts are set aside monthly for the next payment of interest and of principal. In addition to funds required and restricted for current debt service, the authorizing City ordinance for each series of Revenue 32

33 Bonds requires a monthly deposit of an amount equal to 1/60 of the difference between the balance in the Reserve Fund immediately after an issue of Revenue Bonds, and the average annual principal and interest requirements of all outstanding Revenue Bonds. Amounts so deposited are required to be held and restricted as a Reserve Fund for Revenue Bond debt service. Such deposits must continue until the reserve amount equals the average annual principal and interest requirements of all outstanding Revenue Bonds. In addition, if so determined by the City, proceeds from the sale of Revenue Bonds also may be used to satisfy funding requirements for the Reserve Fund. The Reserve Fund is also available for current debt service if the Interest and Sinking Fund is insufficient for this purpose. COMMERCIAL PAPER NOTES PAYABLE... Since 1987, the City has utilized commercial paper as a means to finance, on an interim basis, capital improvements to the System. Currently, the City utilizes two series of commercial paper notes for improvements to the System. The City utilizes a tax-exempt commercial paper program, Series D, for improvements to the System, limited at any one time and from time to time to $300,000,000 in principal amount of commercial paper outstanding. Under the terms of the ordinance establishing the Series D commercial paper program, the authority to issue Series D commercial paper notes expires September 30, In addition, the City utilizes a tax-exempt commercial paper program, Series E, for improvements to the System, limited at any one time and from time to time to $300,000,000 in the principal amount of commercial paper outstanding. Under the terms of the ordinance establishing the Series E commercial paper program, the authority to issue Series E commercial paper notes expires September 30, The City has two different liquidity agreements with three banks. The Series D program is supported by two revolving credit agreements, the Sub-Series D-1 Credit Agreement with State Street Bank and Trust Company, and the Sub-Series D-2 Credit Agreement with Bank of America, N.A., replacing an existing combined liquidity agreement with State Street Bank and the California State Teachers Retirement System. The Sub-Series D-1 Credit Agreement supporting Sub-Series D-1 of the Notes, which extends to January 8, 2018, is in an aggregate amount not exceeding $241,643,836 (of which amount $16,643,836 is intended to cover interest for 270 days at 10%). The Sub-Series D-2 Credit Agreement supporting Sub-Series D-2 of the Notes, which extends to January 8, 2018, is in an aggregate amount not exceeding $80,547,946 (of which amount $5,547,946 is intended to cover interest for 270 days at 10%). The Series E commercial paper program is supported by a liquidity facility delivered by JPMorgan Chase Bank, National Association ( JPMC ). The liquidity agreement supporting the Series E commercial paper program (the JPMC Agreement ), which extends to September 30, 2017, is in an aggregate amount not exceeding $322,191, (of which amount $22,191, is intended to cover interest for 270 days at 10%). The obligation of the City under the Sub-Series D-1 Credit Agreement, the Sub-Series D-2 Credit Agreement and the JPMC Agreement (collectively, the Liquidity Agreements ) to repay advances made by a provider is subordinate to the obligation to pay debt service on the outstanding Previously Issued Parity Bonds, the Bonds and any Additional Bonds. Any advances under the Liquidity Agreements would be secured by a lien on Pledged Revenues subordinate to the lien securing the Bonds. On March 10, 2015, Commercial Paper Notes in the aggregate principal amount of $216,565,000 were outstanding, maturing on various dates through March 31, 2015, having interest rates ranging from 0.04% to 0.06%. All of the Commercial Paper Notes outstanding on March 10, 2015 will be refunded with proceeds of the Series 2015A Bonds. FUTURE BOND ISSUANCE The City currently does not intend to issue additional System revenue bonds within the next 12 months. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 33

34 FINANCIAL INFORMATION TABLE 13 SUMMARY OF OPERATIONS (AMOUNTSIN THOUSANDS) Fiscal Year Ended September 30, Operating Revenues (1) Water $ 330,006 $ 319,129 $ 321,997 $ 278,419 $ 271,399 Wastewater 221, , , , ,530 $ 551,498 $ 527,374 $ 524,281 $ 467,527 $ 467,929 Operating Expenses Operation and Maintenance $ 259,556 $ 256,095 $ 251,295 $ 258,506 $ 264,908 Depreciation and Amortization 105,528 99,619 95,160 99,283 92,106 $ 365,084 $ 355,714 $ 346,455 $ 357,789 $ 357,014 Operating Income $ 186,414 $ 171,660 $ 177,826 $ 109,738 $ 110,915 NetInterestExpense (2) (70,037) (70,841) (71,032) (65,284) (52,725) Capital Contribution Received 11,411 5,510 8,040 10,345 14,825 Net Transfers (19,008) (17,210) (14,637) (12,038) (4,589) Gain/(Loss) From Property Disposal (610) (249) 75 (93) 93 Change in Net Position $ 108,170 $ 88,870 $ 100,272 $ 42,668 $ 68,519 Water Customer Accounts 292, , , , ,000 Wastewater Customer Accounts 276, , , , ,000 Water Connections 329, , , , ,000 (1) In 1981, the City Council adopted a financial criterion for Dallas Water Utilities cost of service studies, which requires an annual review of customer service rates and the recommendation of rate adjustment when appropriate. Operating Revenues shown above reflect rate adjustments effective October 1 at the beginning of each fiscal year. (2) Interest earnings and capitalized interest are included above as a reduction of Net Interest Expense. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 34

35 TABLE 14 PROJECTED COVERAGE AND FUND BALANCES Average Annual Principal and Interest Requirements, Fiscal Years $ 111,245,725 Coverage of Average Requirements by Fiscal Year Ended Net Revenues 2.89 x Maximum Principal and Interest Requirements, Fiscal Year 2016 $ 182,860,321 Coverage of M aximum Requirements by Fiscal Year Ended Net Revenues 1.76 x Waterworks and Sewer System Revenue Bonds to be Outstanding (as of 03/25/2015) $ 2,106,323,000 Interest and Sinking fund (as of ) $ 131,479,269 Reserve Fund (as of ) $ 95,902,279 TABLE 15 SUMMARY OF NET REVENUES FOR REVENUE BOND COVERAGE -CASH BASIS (AMOUNTS IN THOUSANDS) (1) Fiscal Year Ended September 30, Gross Revenues Customer Charges $ 552,414 $ 531,949 $ 503,463 $ 474,241 $ 475,248 Interest Received 2,272 3,340 4,577 4,271 15,481 $ 554,686 $ 535,289 $ 508,040 $ 478,512 $ 490,729 Operating Expenditures Personnel Services $ 79,105 $ 71,447 $ 74,285 $ 77,542 $ 75,027 Supplies and Materials 83,261 82,518 82,069 78,121 81,240 Contractual and Other Services (2) 70,811 81,796 72,490 84,454 89,579 $ 233,177 $ 235,761 $ 228,844 $ 240,117 $ 245,846 Net Revenues Available for Debt Service $ 321,509 $ 299,528 $ 279,196 $ 238,395 $ 244,883 (1) The figures shown in this table are presented on a cash basis and were developed in accordance with the provisions contained in the City s Waterworks and Sewer System Revenue Bond Ordinances. Gross Revenues include cash receipts derived from operation and ownership of the System. Operating Expenditures are operating cash disbursements and payments required by certain reservoir and other contracts, included for this purpose under provisions of state law. Operating Expenditures exclude payments for capital purposes and for related debt, and will exclude any future payments to the City in lieu of ad valorem taxes, if made, as permitted by a May 1993 amendment to the City Charter (see THE WATER AND WASTEWATER SYSTEM - Background and THE WATER AND WASTEWATER SYSTEM - Water and Wastewater Services Rates ). (2) Cash payments for contractual services includes payments for the Water Transmission Facilities Financing Agreement in the amount of $7,903. Under Texas Government Code, Section (c), a contract between a municipality and an issuer, as defined by Section , under which the municipality obtains from the issuer or the issuer provides part or all of the facilities or services of a utility system to the municipality may provide that payments made by the municipality from the revenue of the utility system are an operating expense of the municipality s utility system. UTILITYPROPERTYANDSYSTEMEQUITY The City s water system consists generally of water supply resources, including water reservoirs and water rights, major water transmission and conveyance facilities, water treatment plants and treated water distribution facilities, and related miscellaneous assets designed to serve the City and other wholesale and retail customers located in the North Texas area. The City s wastewater system consists generally of residential, commercial and industrial wastewater collection systems and wastewater treatment and disposal facilities for the City and other wholesale and retail customers located in the North Texas area. 35

36 At September 30, 2013, property, plant and equipment of Dallas Water Utilities, stated at cost, less accumulated depreciation and amortization, together with the cost of construction in progress, was $4,210,570,000. At said date, the total net position of the System was $2,393,000,000 and consisted of amounts invested in capital assets, net of related debt, amounts restricted for bond requirements and unrestricted amounts. The ratio between debt and equity (net position) is subject to change based upon numerous factors, including, but not limited to, changes in capital improvement program implementation and whether debt or internal funds are used to pay for capital improvements. TABLE 16 NET POSITION AND LONG TERM DEBT (AMOUNTS IN THOUSANDS) Fiscal Year Ended September 30, Net Position - System Equity (1) (3) Capital assets, net of related debt $ 2,011,972 $ 1,962,446 $ 1,899,076 $ 1,880,460 $ 1,827,258 Restricted 186, , , , ,860 Unrestricted 194, , ,369 64,450 59,979 Total Equity $ 2,393,000 $ 2,284,830 $ 2,195,960 $ 2,106,765 $ 2,064,097 Long-Term Debt Less Current Maturities Revenue Bonds Payable (2) $ 2,016,107 $ 1,951,883 $ 1,857,406 $ 1,796,494 $ 1,638,060 Pension Obligation Bonds (2) 76,602 79,564 81,622 84,297 86,762 Total Long-Term Debt Less Current Maturities $ 2,092,709 $ 2,031,447 $ 1,939,028 $ 1,880,791 $ 1,724,822 Total $ 4,485,709 $ 4,316,277 $ 4,134,988 $ 3,987,556 $ 3,788,919 Percentage Equity 53.3% 52.9% 53.1% 52.8% 54.5% (1) In accordance with GASB Statement 63, System Equity is now termed Net Position. (2) Due to the implementation of GASB 63 and 65, deferred loss is no longer reported as a component of long term debt. (3) Restated as a result of the implementation of GASB Statement 63. FINANCIAL POLICIES The original Financial Management Performance Criteria ( FMPC ) were adopted by the City Council in March 1978 as standards to guide managerial decisions in operating and capital budgeting, as well as to promote efficient administration of the City s financial policies. In 1981, the City Council adopted a financial criterion for Dallas Water Utilities Cost of Service studies, which requires an annual review of Customer Service rates and the recommendation of rate adjustment when appropriate. Operating Revenues shown above reflect adjustments effective October 1 at the beginning of each fiscal year. The City Council last amended the FMPC in September The FMPC guide many of the City s financial decisions and enable the City to achieve a long-term positive financial condition. The FMPC are evaluated for compliance each year during the budget preparation/approval process, at fiscal year end and prior to each debt issuance. Financial criteria applying specifically to Dallas Water Utilities were updated by the City Council in September 28, 2011, to ensure prudent financial administration consistent with current circumstances and appropriate financial procedures. Provisions of Dallas Water Utilities Financial Criteria include (1) adequacy of current revenues, (2) use of debt only for capital improvements with long expected useful lives, (3) maintenance of system equity and revenue bond coverage, (4) application of revenues for construction purposes, (5) annual cost of service reviews and recommendation of rate adjustments, and (6) use of water and wastewater funds solely for water and wastewater purposes. The criteria are grouped into the following areas: OPERATING PROGRAMS These criteria pertain to revenues and expenditures, ad valorem tax levy, retirement systems and adequacy of reserves. As an example, certain criteria in this section require the City to maintain the Contingency and Emergency Reserves plus the undesignated, unreserved fund balance at a specified minimum level in relation to operating expenditures and to review the adequacy of other General Fund Reserve accounts at specified intervals. CAPITAL AND DEBT MANAGEMENT These criteria pertain to the City s general obligation bonds, debt levels and the use of certificates of obligation and tax increment financing zone/public improvement district financing. The City policy is to not use bond proceeds, grants or other non-recurring revenues for current expenses. 36

37 ACCOUNTING,AUDITING AND FINANCIAL PLANNING These criteria pertain to audit and accounting standards and requirements for financial planning. CASH MANAGEMENT These criteria pertain to the disbursement, collection and deposit of all funds, investment of idle cash and banking services. GRANTS AND TRUSTS These criteria pertain to grant and trust administration. WATER UTILITIES... These criteria pertain to Dallas Water Utilities system rates, revenues, reserves, and debt financing. BASIS OF ACCOUNTING The City policy is to adhere to the accounting principles set out by the Governmental Accounting Standards Board, as amended. DEBT SERVICE FUND BALANCES... The City maintains the Interest and Sinking Fund and the Reserve Fund supporting the Prior Encumbered Bonds in accordance with ordinance authorizing the issuances of the Prior Encumbered Bonds. The City will maintain the Debt Service Fund and the Reserve Fund supporting the Parity Obligations (including the Bonds) in accordance with the ordinances authorizing the issuance of Parity Obligations. USE OF DEBT PROCEEDSANDGRANTS... The City policy is to use debt proceeds and grants for capital expenditures only, not for operations. BUDGETARY PROCEDURES... The City policy is to begin the budgetary procedure at the department level in January of each year. The budget proceeds through department levels until it reaches the City Manager level where it is refined and presented to Council in mid-august. The Council considers, amends and refines the budget until its final adoption prior to the end of September. The City adopted its fiscal year budget by ordinance on September 17, The ordinance provides for budgetary control at the department level. Budgetary compliance is maintained in the automated accounting system and enforced at the department level by reserving appropriations by encumbering purchase orders and contracts. PENSION PLANS Eligible City employees participate in the Employees' Retirement Fund of the City of Dallas, the Dallas Police and Fire Pension System, and the Police and Fire Supplemental Pension Fund. Descriptions of each of the City s pension plans with selected financial data are set forth below. In accordance with the Texas Constitution and related statutes, each of the City s pension plans are administered by a board of trustees that are selected in accordance with the terms of the relevant plan document. These boards are responsible for administering each plan; hiring a plan administrator; selecting legal counsel; selecting the plan s actuary; and approving sound actuarial assumptions for each plan. The contributions made to each plan by the City and the employees who participate in each plan are determined by the terms of the plan document and relevant City ordinances. The amount of the contributions described in the plan documents, are either fixed; determined by a fixed formula described in the plan that is based on annual calculations made by the plan s actuary; or based on an actuarial calculation with specified assumptions and approved by the relevant board. Additionally, each board also administers a qualified governmental excess benefit arrangement associated with each plan which are maintained solely for the purpose of providing its members with that part of the members benefits that would have been provided under its qualified plan but for certain limitations imposed by the Internal Revenue Code. The City is making all of the contributions as required by the plan documents, as requested by each plan administrator on behalf of each board of trustees. The financial information below is based entirely on information provided to the City by each plan administrator on behalf of each plan s board of trustees. As of the date of this Official Statement, the City has received an audited Comprehensive Annual Financial Report from the Dallas Police and Fire Pension System and the Supplemental Police and Fire Pension Plan of the City of Dallas, and from the Employees Retirement Fund of the City of Dallas for the period ended December 31, Additionally, the City has received unaudited calculations performed by the actuaries for each plan as of and for the period ended December 31, Employees Retirement Fund of the City of Dallas... All eligible employees of the City, excluding fire fighters and police officers, participate in the Employees Retirement Fund of the City of Dallas ( ERF ). Benefits are based on credited service and average monthly earnings and include normal retirement pension at age 60, early retirement pension at age 55 if employed before May 9, 1972 or at least age 50, for active employees, where age and years of service total 78, service retirement pension at any age after 30 years of credited service and disability retirement pension as determined by the Board of Trustees of the ERF (the Board ). Survivor benefits are available before and after retirement. If a member s employment is terminated after five years of service, the member mayelect to receive pension benefits, when eligible, equal to the amount accrued to date of termination. Contribution rates for employees and the City are subject to annual adjustments based on actuarial determinations and fixed formulas. Employees pay 37% and the City pays 63% of the total cost of the ERF, including the debt service on the City s outstanding pension obligation bonds, but not exceeding 36% of payroll. This funding approach was added to the ERF plan terms in preparation 37

38 for the issuance of pension obligations bonds in 2005 to support the City s long-term funding of the plan during future business cycles. On January 19, 2005, the City issued $399,347,609 par value Taxable General Obligation Pension Bonds, Series Proceeds totaling $533,397,000 were contributed to the ERF to partially fund an unfunded actuarial accrued liability of approximately $646 million, which had been identified in the annual actuarial report of ERF invested the contributed proceeds consistent with its investment policy. For the plan fiscal year ended on December 31, 2012 and 2013, the unfunded actuarial accrued liability ( UAAL ) was reported as $672,232,000 and $536,561,000, respectively, and the annual actuarially required contribution rate the City would need to pay to fund the UAAL over 30 years for the respective periods were 40.47% and 37.74% of payroll. As of December 31, 2013, the actuarial value of the ERF s assets were $3,074,284,000 and its funded ratio was 85.1%, based on the actuarial value of the assets. The funded ratio based on the market value of assets was 92.1%. For the fiscal year ended September 30, 2014, each employee contributed 13.06% and the City contributed 22.23% of pay for a total of 35.29%. For the fiscal year that began October 1, 2014, the plan actuary notified the City that the contribution rates would not change under the fixed formula in the plan document that is codified as Chapter 40A of the Dallas City Code ( Chapter 40A ). This 35.29% of payroll is less than the annual actuarially required contribution calculated by the plan s actuary based on the plan s experience for the one-year period ended on December 31, 2013, but is consistent with the City s long-term funding strategy implemented in 2005 and Chapter 40A. A portion of the City s contribution is expected to pay $32,477,655 in debt service on the pension obligation bonds during the fiscal year beginning on October 1, For additional detail about the City s schedule of employer contributions, actuarial methods and assumptions, funded status and funded progress, see the City s Comprehensive Annual Financial Report for the Fiscal Year ended September 30, 2013, particularly Note 16. DallasPoliceandFirePensionSystem...TheDallasPoliceandFirePensionSystem(the DPFPSystem )includesthreepension plans identified as the Combined Pension Plan (formerly the Old Plan, Plan A, and Plan B ). Although there are multiple benefit structures involved (such as Group A, which consists of former Old Plan and Plan A members, and Group B, which consists of former Plan B members), the Dallas Police and Fire Pension System is a qualified pension plan. All eligible employees of the Fire-Rescue Department and Police Department participate in one of the benefit structures within the plan, with Group B covering more than 99% of the members. Participation in Group B (formerly Plan B ) is mandatory for those employed on or after March 1, All contributing members of the pension System were hired after that date and are now covered in Group B. Additional benefit structures were added to the Group B benefits through plan amendments in 2006, 2011 and Persons who are eligible to retire but remain in City service may choose to be covered by the Deferred Retirement Option Plan (DROP) provisions of Group B. All members of the DPFP System and DROP currently contribute 8.5% of their computation pay excluding overtime and special assignment pay. As described in the more detail below, effective January 1, 2015, the contribution rate for current members in DROP changed to 4% of computation pay. The City contributes 27.5% of total wages and salaries. Vesting of Service Requirement occurs for members of Group B hired before March 1, 2011, after five years. Generally, benefits for Group B are based on average computation pay over the employee's highest 36 consecutive months of credited service and are available for vested members attaining the age of 50. Reduced benefits are available to persons with five or more years of service at age 45 and to persons with 20 or more years of service at any age. Under Group B, disability benefits and survivors benefits are payable at occurrence. Effective October 1, 2011, current members participating in DROP began making contributions to the DPFP System and all members hired on or after March 1, 2011 received reduced pension benefits. The reduced pension benefits applicable to new hires on or after March 1, 2011 included a multiplier between 2% and 3% depending on years of service, a 20-year vesting period (now amended to 10 years by the 2014 election as described below), an increase in the earliest age to retire to age 55, stricter criteria to receive disability benefits, and survivor benefits that are consistent with the reduced pension benefits. On November 13, 2014, the Board of the DPFP System certified election results approving additional plan amendments, as more fully described in the paragraph below. Prior to the certification of the election results, a lawsuit was filed in State District Court by certain members of the DPFP System challenging the constitutionality of the plan amendments, particularly related to proposed amendments to DROP. On December 31, 2014, the State District Judge entered a final declaratory judgment ruling in favor of the plaintiffs and held that all of the 2014 plan amendments violated the Texas Constitution. An amended final judgment was entered on January 22, 2015 superseding the final judgment and affirming that the plan amendments respecting DROP and vesting rules violate the Texas Constitution thus rendering them null and void, but retracting the invalidation of another plan amendment. The DPFP Board has filed a motion seeking to invalidate or further modify this amended final judgment and, due to severe weather conditions, a hearing originally set for March 5, 2015 has been rescheduled to March 26, If these plan amendments are ruled to be effective, the following provisions will be revised: (1) the contributions of current members participating in DROP would be reduced from the current 8.5% of computation pay to 4% of computation pay; (2) the DROP interest rate would be set at 5% effective October 1, 2017, with a step down from the current 8% DROP interest rate by one percent 38

39 (1%) each year until the rate reaches 5% as follows: 10/1/2014-8%; 10/1/2015-7%; 10/1/2016-6%; and 10/1/2017-5%, with additional triggers on which scheduled interest rates credited to DROP accounts could be adjusted each year based on the funded ratio and cumulative gain or loss in the DROP accounts; (3) any current member participating in DROP would be allowed a onetime opportunity to revoke or undo his or her election to enter DROP, such rescission to be made on the earlier of the date the member leaves active service or June 30, 2015; (4) only a DROP participant s spouse who is the beneficiary of the participant s DROP account could maintain a DROP Account after a participant s death; (5) on attaining age 70½, all members and their surviving spouses would be required to take a distribution from DROP each year until the DROP account is paid out through distributions over a period that does not exceed 10 years. These plan amendments would also lower the vesting provisions for members hired on or after March 1, 2011 from 20 years of pension service to 10 years of pension service. The change would also provide a DROP interest rate that would be the same for all DROP participants regardless of hire date. In addition, on January 7, 2015, DPFP System s independent actuary, Buck Consultants, LLC, certified to the DPFP System under section 6.14 of the combined plan document that the need to shift plan assets to pay future DROP benefits could lead to a situation that could be considered a significant actuarial loss to the System. In response to this communication, on January 8, 2015, the DPFP Board voted to suspend new DROP enrollments pending the outcome of the litigation challenging the plan amendments for all DPFP participants starting on April 1, The City s contributions to the DPFP System are determined by state statute and would not be impacted by the outcome of the litigation related to the DROP amendments. The contributions are dependent on the level of member contributions, but are unrelated to unfunded accrued liability amounts. The current city contribution rate is 27.5% of total wages and salary as defined in the DPFP System s plan document. The City has made all contractually required contributions and has previously taken the position it is not legally obligated to fund any additional amounts. For the fiscal years ended on December 31, 2012 and 2013, the UAAL for the Combined Pension System was reported as $1,063,181,047 and $1,251,874,626 respectively and the annual required contribution rates the City would need to pay to fund the UAAL over 30 years, for the respective periods, were 28.35% and 29.03% of payroll. For the valuation year beginning January 1, 2013, the DPFP System adopted an accounting method change from five-year asset smoothing to ten-year asset smoothing of its investment gains and losses. The change was implemented to reflect the DPFP System s long term nature of its funding policy. This resulted in a gain on assets in the amount of $483,872,726. Under the five-year asset smoothing, losses from 2008 were already recognized in the actuarial value of assets. The City s independent actuarial audit noted that the DPFP System s change to ten-year asset smoothing reversed fifty percent of that recognition and increased the actuarial value of assets by 14.6%. The change also increased the DPFP System s funded ratio, based on the actuarial value of assets, from 68.16% to 78.12%, and decreased the funding period by 19 years. The funded ratio based on the market value of assets was 65.6% and 75.6% based on the actuarial value of assets as of December 31, The change from five-year to ten-year asset smoothing has no impact on the amount the City has to contribute to the DPFP System each year. For additional detail about the City s schedule of employer contributions, actuarial methods and assumptions, funded status and funded progress, see the City s Comprehensive Annual Financial Report for the Fiscal Year end September 30, 2013, particularly Note 16. Supplemental Police and Fire Pension Plan of the City of Dallas... The Supplemental Police and Fire Pension Plan System of the City of Dallas (the Supplemental DPFP Plan ) is a defined benefit pension plan created in 1973 to supplement Plan B of the Dallas Police and Fire Pension System. The intent is to provide retirement benefits to those employees holding rank higher than the highest corresponding Civil Service rank as provided in the Combined Pension Plan. Additionally eligible members of the Supplemental DPFP Plan who enter DROP in the DPFP System enter DROP in the Supplemental Plan. If ruled to be valid, the proposed plan amendments to DROP benefits discussed above, would also apply to DROP benefits under the DPFP Supplemental Plan. Employees electing to participate in the Supplemental Pension Plan contribute 8.5% of the excess of their base compensation for the rank held over the compensation of the Civil Service rank held as a result of competitive examinations. By ordinance, the City has legally obligated itself to fund the actuarially required amount each year. The City contributed $1,954,022 and $1,935,588 for the periods ended December 31, 2012 and 2013, respectively. For the plan fiscal years ended December 31, 2012 and 2013, the UAAL for the Supplemental Police and Fire Pension Plan was reported as $15,702,369 and $14,740,169, respectively. The City s contribution rate is intended to be sufficient to amortize the UAAL over ten years; however, in no event is the City s contribution to be less than the amount necessary to satisfy GASB Statement No. 27. As of January 1, 2014, the market value of the Supplemental Police and Fire Pension Fund plan assets was $24,036,845 and the funded ratio was 62%. RISK MANAGEMENT PROGRAM... The City is self-insured for all third-party liability claims. Effective May 1, 2012, the City began adjusting the liability claims internally. Interfund premiums are based primarily upon the insured funds claims experience and exposure and are reported as cost reimbursement interfund transactions. All known City property, primarily buildings and contents, is insured through commercial insurance policies, subject to a deductible of $1,000,000 per occurrence. The City has reported losses against its property insurance policy for two claims: 1) March 24,

40 Hail Damage and 2) October 2013 Sewer Pipe Break. Prior to March 24, 2011, no losses had exceeded the insurance deductible for the past three fiscal years. Claims adjusting services are provided by an independent administrative services contractor for all workers compensation. The City is insured by workers compensation losses in excess of $1 million. Claims exceeding $1 million are covered by an Excess Workers Compensation insurance policy. Workers compensation premiums are billed annually by Risk Management to the different funds based on the loss experience and number of full-time employees of respective departments. All workers compensation losses are accumulated in a clearing fund which is being reimbursed by the premiums collected. When losses exceed premiums, the deficiencies are prorated and supplemented by the various applicable funds. Accrued workers compensation liability consists of incurred but not received as well as unpaid reported claims. The City maintains a group health insurance plan for employees and dependents which is self-insured by the City. OTHER POST-EMPLOYMENT BENEFITS In addition to pension benefits, the City provides certain other post-employment benefits for retired employees ( OPEB ). The costs of these benefits are recognized as expenditures on a modified accrual basis when the underlying claims are paid. The City is required to prepare an actuarial report estimating an Actuarial Accrued Liability ( AAL ) which reflects the value of future benefits payments based on certain assumptions including the current level of benefits. The Statement also requires the City to amortize the AAL over a period not to exceed 30 years and record a portion of liability each year. This accumulated amortization of the AAL is reported as an OPEB obligation in the City s financial statements. The City received the actuarial valuation report from an outside consultant regarding the City s October 1, 2012 OPEB obligations. As of September 30, 2013, the City estimated an Actuarial Accrued Liability of $635 million. The City has elected to amortize this liability over a 30-year period as a level percentage of payroll. The net OPEB obligation as of September 30, 2013 was estimated to be $207 million. INVESTMENT POLICY... The City invests its investable funds in investments authorized by the Public Funds Investment Act, Chapter 2256, Texas Government Code (the PFIA ) and other applicable Texas law and in accordance with its Investment Policy. Both State law and the City s Investment Policy are subject to change. The City Council last approved the Investment Policy on September 24, Legal Investments... Under Texas law, the City is authorized to invest in (1) obligations, including letters of credit, of the United States or its agencies and instrumentalities, (2) direct obligations of the State of Texas or its agencies and instrumentalities, (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States, (4) other obligations, the principal and interest of which are unconditionally guaranteed or insured by, or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities, (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent, (6) bonds issued, assumed, or guaranteed by the State of Israel, (7) certificates of deposit and share certificates (i) issued by a depository institution that has its main office or branch office in the State of Texas, that are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses (1) through (6) or in any other manner and amount provided by law for city deposits, or (ii) where (a) the funds are invested by the City through (i) a broker that has its main office or branch office in this state and is selected from a list adopted by the City; (ii) a depository institution that has a main office or branch office in this state and that is selected by the City; (b) the broker or depository institution selected by the City arranges for the deposit of funds in one or more federally insured depository institutions, wherever located; (c) the certificates of deposit are insured by the United States or an instrumentality of the United States; and (d) the City appoints the depository institution acts as a custodian for the City with respect to the certificates of deposit, and entity described by (d) Government Code, or clearing broker-dealer registered with the Securities and Exchange Commission and operating pursuant to Securities and Exchange Commission Rule 15c3-3 (17 C.F.R., section c3-3); (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1), and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas, (9) bankers acceptances with a stated maturity of 270 days or less from the date of its issuance, if the short-term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency, (10) commercial paper that is rated at least A-1 or P-1 or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank, (11) no-load money market mutual funds registered with and regulated by the SEC that meet the requirements of the PFIA, and are rated not less than Aaa or its equivalent rating by at least one nationally recognized rating service, (12) no-load mutual funds registered with the SEC that have an average weighted maturity of less than two years, invest exclusively in obligations described in the preceding clauses, and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than Aaa or its equivalent, and (13) public funds investment pools that have an advisory board which includes participants in the pool and are continuously rated as to investment quality by at least one 40

41 nationally recognized investment rating firm of not less than Aaa or its equivalent or no lower than investment grade. Texas law also permits the City to invest bond proceeds in a guaranteed investment contract, subject to limitations as set forth in the PFIA. A political subdivision such as the City may enter into securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than A or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (10) through (12) above, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the City, held in the City s name and deposited at the time the investment is made with the City or a third party designated by the City; (iii) a loan made under the program through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less. The PFIA specifically prohibits the City from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security collateral and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. In addition, the City is prohibited from investing any portion of bond proceeds, reserves and funds held for debt service in no-load mutual funds. Additional Provisions... Under Texas law, the City Council is required to designate one or more investment officers who are responsible for the investment of the City s funds, under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that include a list of authorized investments for City funds, maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups. All City funds must be invested consistent with a formally adopted Investment Strategy Statement that specifically addresses each fund s investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, City investments must be made with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person s own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived. At least quarterly, the investment officers of the City shall submit an investment report: (1) that describes in detail the investment position of the City, (2) that all investment officers jointly prepared and signed the report, (3) that contains a summary statement, which includes the beginning market value, the ending market value and fully accrued interest during the reporting period of each pooled fund group, (4) that states the book value and market value of each separately listed asset at the beginning and end of the reporting period, (5) that states the maturity date of each separately invested asset, (6) that states the accountor fund or pooled fund group for which each individual investment was acquired, and (7) that states the compliance of the investment portfolio as it relates to: (a) adopted investment strategy statements and (b) State law. The investment officers responsible for the investment of City Funds must be designated by the City Council, and no person may invest City funds without express written authority from City Council. Under Texas law, the City additionally must: (1) annually review its adopted policies and strategies and adopt an ordinance or resolution stating that it has reviewed its investment policy and investment strategies and records any changes made to either its investment policy or investment strategy in the said ordinance or resolution; (2) require any investment officers with personal business relationships or relatives with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the City Council; (3) adopt a rule, order, ordinance or resolution stating that it has reviewed its investment policy and investment strategies and records any changes made to either its investment policy or investment strategy in the respective rule, order, ordinance or resolution (4) require a qualified representative of firms seeking to sell securities to the City to: (a) receive and review the City s investment policy, (b) acknowledge that reasonable controls and procedures have been implemented in an effort to preclude unauthorized investment activities, and (c) deliver a written statement attesting to these requirements; (5) perform an annual audit of the management controls on investments and adherence to the City s investment policy; (6) provide specific investment training for the Treasurer, Chief Financial Officer and investment officers; (7) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement; (8) restrict the investment in non-money market mutual funds to no more than 15% of the entity s monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service; (9) require local government investment pools to conform to the disclosure, rating, net asset value, yield calculation, and advisory board requirements of the PFIA; and (10) at least annually review, revise and adopt a list of qualified brokers that are authorized to engage in investment transactions with the City. Under Texas law, the City may contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the City retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the City must do so by order, ordinance, or resolution. 41

42 City Investment Policy... City policy requires investments in accordance with applicable Texas law, specifically the PFIA. The City s Investment Policy does not permit the investment of City funds in all eligible investments permitted by Texas law. Of those eligible investments described above under Legal Investments, bankers acceptances, commercial paper, certain collateralized mortgage obligations, reverse repurchase agreements, no-load mutual funds, State of Israel bonds and guaranteed investment contracts are not authorized for investment purposes under the City s Investment Policy. The City generally invests in obligations of the United States or its agencies and instrumentalities and in Aaa -rated no-load money market mutual funds and public funds investment pools. In addition to such limitations, the City s Investment Policy permits the investment of bond funds (including debt service and reserve funds) in the manner permitted by the respective ordinances authorizing the issuance of bonds. Neither the PFIA nor the City s Investment Policy govern the investment of pension and other deferred compensation funds, and those funds are not included in the investment totals below. CurrentInvestments...AsofDecember31,2014,thefollowingpercentagesbyinvestmenttypeappliedtotheCity sinvestable funds, which had an unaudited aggregate market value of $1,374,171,825. TABLE 17 - CURRENT INVESTMENTS Type of Investment Market Value % of Total U.S. Agencies $ 1,079,151, % Money Market Mutual Funds and Local Government Investment Pools 295,020, % $ 1,374,171, % [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] 42

43 TAX MATTERS THE BONDS GENERAL... The following discussion is a summary of certain expected material federal income tax consequences of the purchase, ownership and disposition of the Bonds and is based on the Internal Revenue Code of 1986 (the Code ), the regulations promulgated thereunder, published rulings and pronouncements of the Internal Revenue Service ( IRS ) and court decisions currently in effect. There can be no assurance that the IRS will not take a contrary view, and no ruling from the IRS, has been, or is expected to be, sought on the issues discussed herein. Any subsequent changes or interpretations may apply retroactively and could affect the opinion and summary of federal income tax consequences discussed herein. The following discussion is not a complete analysis or description of all potential U.S. federal tax considerations that may be relevant to, or of the actual tax effect that any of the matters described herein will have on, particular holders of the Bonds and does not address U.S. federal gift or estate tax or (as otherwise stated herein) the alternative minimum tax, state, local or other tax consequences. This summary does not address special classes of taxpayers (such as partnerships, or other pass-thru entities treated as a partnerships for U.S. federal income tax purposes, S corporations, mutual funds, insurance companies, financial institutions, small business investment companies, regulated investment companies, real estate investment trusts, grantor trusts, former citizens of the U.S., broker-dealers, traders in securities and tax-exempt organizations, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be subject to or personal holding company provisions of the Code or taxpayers qualifying for the health insurance premium assistance credit) that are subject to special treatment under U.S. federal income tax laws, or persons that hold Bonds as a hedge against, or that are hedged against, currency risk or that are part of hedge, straddle, conversion or other integrated transaction, or persons whose functional currency is not the U.S. dollar. This summary is further limited to investors who will hold the Bonds as capital assets (generally, property held for investment) within the meaning of section 1221 of the Code. This discussion is based on existing statutes, regulations, published rulings and court decisions, all of which are subject to change or modification, retroactively. As used herein, the term U.S. Holder means a beneficial owner of a Bond who or which is: (i) an individual citizen or resident of the United States, (ii) a corporation or partnership created or organized under the laws of the United States or any political subdivision thereof or therein, (iii) an estate, the income of which is subject to U.S. federal income tax regardless of the source; or (iv) a trust, if (a) a court within the U.S. is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) the trust validly elects to be treated as a U.S. person for U.S. federal income tax purposes. As used herein, the term Non-U.S. Holder means a beneficial owner of a Bond that is not a U.S. Holder. THIS SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY AND DOES NOT DISCUSS ALL ASPECTS OF THE U.S. FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF BONDS IN LIGHT OF THE HOLDER S PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. PROSPECTIVE HOLDERS OF THE BONDS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX TREATMENT WHICH MAY BE ANTICIPATED TO RESULT FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE BONDS BEFORE DETERMINING WHETHER TO PURCHASE BONDS. THE FOLLOWING DISCUSSION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED BY ANY TAXPAYER, TO AVOID PENALTIES THAT MIGHT BE IMPOSED ON THE TAXPAYER IN CONNECTION WITH THE MATTERS DISCUSSED THEREIN. INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE TAX IMPLICATIONS OF THE PURCHASE, OWNERSHIP OR DISPOSITION OF THE BONDS UNDER APPLICABLE STATE OR LOCAL LAWS, OR ANY OTHER TAX CONSEQUENCE. FOREIGN INVESTORS SHOULD ALSO CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX CONSEQUENCES UNIQUE TO NON-U.S. HOLDERS. INFORMATION REPORTING ANDBACKUP WITHHOLDING... Subject to certain exceptions, information reports describing interest income, including original issuediscount, with respect to the Bonds will be sent to each registered holder and to the IRS. Payments of interest and principal may be subject to backup withholding under section 3406 of the Code if a recipient of the payments fails to furnish to the payor such owner's social security number or other taxpayer identification number ( TIN ), furnishes an incorrect TIN, or otherwise fails to establish an exemption from the backup withholding tax. Any amounts so withheld would be allowed as a credit against the recipient s federal income tax. Special rules apply to partnerships, estates and trusts, and in certain circumstances, and in respect of Non-U.S. Holders, certifications as to foreign status and other matters may be required to be provided by partners and beneficiaries thereof. 43

44 SERIES 2015A BONDS OPINION... On the date of initial delivery of the Series 2015A Bonds, Co-Bond Counsel will render their opinion that, in accordance with statutes, regulations, published rulings and court decisions existing on the date thereof ( Existing Law ), (1) for federal income tax purposes, interest on the Series 2015A Bonds will be excludable from the gross income of the holders thereof and (2) the Series 2015A Bonds will not be treated as "specified private activity bonds" the interest on which would be included as an alternative minimum tax preference item under section 57(a)(5) of the Code. Except as stated above, Co-Bond Counsel will express no opinion as to any other federal, state or local tax consequences of the purchase, ownership or disposition of the Series 2015A Bonds. See Appendix D Forms of Co-Bond Counsel s Opinions. In rendering their opinion, Co-Bond Counsel will rely upon (a) certain information and representations of the City, including information and representations contained in the City's federal tax certificate related to the Series 2015A Bonds, (b) covenants of the City contained in the Series 2015A Bond Ordinance relating to certain matters, including arbitrage and the use of the proceeds of the Series 2015A Bonds and the property financed or refinanced therewith and (c) the report issued by the Verification Agent (see OTHER INFORMATION Verification of Arithmetical and Mathematical Computations ). Failure by the City to observe the aforementioned representations or covenants could cause the interest on the Series 2015A Bonds to become taxable retroactively to the date of issuance. The Code and the regulations promulgated thereunder contain a number of requirements that must be satisfied subsequent to the issuance of the Series 2015A Bonds in order for interest on the Series 2015A Bonds to be, and to remain, excludable from gross income for federal income tax purposes. Failure to comply with such requirements may cause interest on the Series 2015A Bonds to be included in gross income retroactively to the date of issuance of the Series 2015A Bonds. The opinion of Co-Bond Counsel is conditioned on compliance by the City with such requirements, and Co-Bond Counsel has not been retained to monitor compliance with these requirements subsequent to the issuance of the Series 2015A Bonds. Co-Bond Counsel's opinion regarding the Series 2015A Bonds represents their legal judgment based upon its review of Existing Law and the reliance on the aforementioned information, representations and covenants. Co-Bond Counsel's opinion related to the Series 2015A Bonds is not a guarantee of a result. Existing Law is subject to change by the Congress and to subsequent judicial and administrative interpretation by the courts and the Department of the Treasury. There can be no assurance that Existing Law or the interpretation thereof will not be changed in a manner which would adversely affect the tax treatment of the purchase, ownership or disposition of the Series 2015A Bonds. A ruling was not sought from the IRS by the City with respect to the Series 2015A Bonds or property financed or refinanced with the proceeds of the Series 2015A Bonds. No assurances can be given as to whether the IRS will commence an audit of the Series 2015A Bonds, or as to whether the IRS would agree with the opinion of Co-Bond Counsel. If an audit is commenced, under current procedures the IRS is likely to treat the City as the taxpayer and the holders may have no right to participate in such procedure. No additional interest will be paid upon any determination of taxability. FEDERAL INCOMETAXACCOUNTINGTREATMENT OF ORIGINALISSUE DISCOUNT...Theinitial public offering price to be paid for one or more maturities of the Series 2015A Bonds may be less than the principal amount thereof or one or more periods for the payment of interest on the bonds may not be equal to the accrual period or be in excess of one year (the Original Issue Discount Bonds ). In such event, the difference between (i) the stated redemption price at maturity of each Original Issue Discount Bond, and (ii) the initial offering price to the public of such Original Issue Discount Bond would constitute original issue discount. The stated redemption price at maturity means the sum of all payments to be made on the bonds less the amount of all periodic interest payments. Periodic interest payments are payments which are made during equal accrual periods (or during any unequal period if it is the initial or final period) and which are made during accrual periods which do not exceed one year. Under Existing Law, any U.S. Holder who has purchased a Series 2015A Bond as an Original Issue Discount Bond in the initial public offering is entitled to exclude from gross income (as defined in section 61 of the Code) an amount of income with respect to such OriginalIssueDiscountBond equaltothatportionoftheamountofsuchoriginalissuediscountallocabletotheaccrual period. For a discussion of certain collateral federal tax consequences, see discussion set forth below. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Bond prior to stated maturity, however, the amount realized by such U.S. Holder in excess of the basis of such Original Issue Discount Bond in the hands of such U.S. Holder (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Bond was held by such initial owner) is includable in gross income. Under Existing Law, the original issue discount on each Original Issue Discount Bond is accrued daily to the stated maturity thereof (in amounts calculated as described below for each accrual period and ratably within each such accrual period) and the accrued amount is added to an initial owner's basis for such Original Issue Discount Bond for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted 44

45 for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Original Issue Discount Bond. All U.S. Holders of Original Issue Discount Bonds should consult their own tax advisors with respect to the determination for federal, state and local income tax purposes of the treatment of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Bonds. COLLATERAL FEDERAL INCOME TAX CONSEQUENCES...InterestontheSeries2015ABondswillbeincludableasanadjustment for "adjusted current earnings" to calculate the alternative minimum tax imposed on corporations by section 55 of the Code. Under section 6012 of the Code, U.S. Holders of tax-exempt obligations, such as the Series 2015A Bonds, may be required to disclose interest received or accrued during each taxable year on their returns of federal income taxation. Section 1276 of the Code provides for ordinary income tax treatment of gain recognized upon the disposition of a tax-exempt obligation, such as the Series 2015A Bonds, if such obligation was acquired at a market discount and if the fixed maturity of such obligation is equal to, or exceeds, one year from the date of issue. Such treatment applies to market discount bonds to the extent such gain does not exceed the accrued market discount of such bonds; although for this purpose, a de minimis amount of market discount is ignored. A market discount bond is one which is acquired by the holder at a purchase price which is less than the stated redemption price at maturity or, in the case of a bond issued at an original issue discount, the revised issue price (i.e., the issue price plus accrued original issue discount). The accrued market discount is the amount which bears the same ratio to the market discount as the number of days during which the holder holds the obligation bears to the number of days between the acquisition date and the final maturity date. FUTURE AND PROPOSED LEGISLATION... Tax legislation, administrative actions taken by tax authorities, or court decisions, whether at the Federal or state level, may adversely affect the tax-exempt status of interest on the Series 2015A Bonds under Federal or state law and could affect the market price or marketability of the Series 2015A Bonds. Any such proposal could limit the value of certain deductions and exclusions, including the exclusion for tax-exempt interest. The likelihood of any such proposal being enacted cannot be predicted. Prospective purchasers of the Bonds should consult their own tax advisors regarding the foregoing matters. TAXABLE SERIES 2015B BONDS Certain U.S. federal income tax consequences to U.S. Holders of the Taxable Series 2015B Bonds are described below. The Taxable Series 2015B Bonds are not issued as obligations, the interest on which is excludable from gross income of holders under section 103 of the Code. PERIODICINTERESTPAYMENTSANDORIGINAL ISSUE DISCOUNT... The Taxable Series 2015B Bonds are not obligations described in section 103(a) of the Code. Accordingly, the stated interest paid on the Taxable Series 2015B Bonds or original issue discount, if any, accruing on the Taxable Series 2015B Bonds will be includable in gross income within the meaning of section 61 of the Code of each owner thereof and be subject to federal income taxation when received or accrued, depending upon the tax accounting method applicable to such owner. DISPOSITION OF TAXABLE SERIES2015B BONDS... An owner will recognize gain or loss on the redemption, sale, exchange or other disposition of a Taxable Series 2015B Bond equal to the difference between the redemption or sale price (exclusive of any amount paid for accrued interest) and the owner's tax basis in the Taxable Series 2015B Bonds. Generally, a U.S. Holder's tax basis in the Taxable Series 2015B Bonds will be the owner's initial cost, increased by income reported by such U.S. Holder, including original issue discount and market discount income, and reduced, but not below zero, by any amortized premium. Any gain or loss generally will be a capital gain or loss and either will be long-term or short-term depending on whether the Taxable Series 2015B Bonds has been held for more than one year. DEFEASANCE OF TAXABLE SERIES 2015B BONDS...DefeasanceofanyTaxableSeries2015BBondmayresultinareissuance thereof, for U.S. federal income tax purposes, in which event a U.S. Holder will recognize taxable gain or loss as described above. STATE,LOCAL AND OTHER TAX CONSEQUENCES...Investorsshould consult their own tax advisors concerning the tax implications of holding and disposing of the Taxable Series 2015B Bonds under applicable state or local laws, or any other tax consequence, including the application of gift and estate taxes. Certain individuals, estates or trusts may be subject to a 3.8% surtax on all or a portion of the taxable interest that is paid on the Taxable Series 2015B Bonds. PROSPECTIVE PURCHASERS OF THE TAXABLE SERIES 2015B BONDS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE FOREGOING MATTERS. 45

46 Certain U.S. federal income tax consequences to Non-U.S. Holders of the Taxable Series 2015B Bonds are described below. A Non-U.S. Holder that is not subject to U.S. federal income tax as a result of any direct or indirect connection to the U.S. in addition to its ownership of a Taxable Series 2015B Bond, will not be subject to U.S. federal income or withholding tax in respect of such Taxable Series 2015B Bond, provided that such Non-U.S. Holder complies, to the extent necessary, with identification requirements including delivery of a signed statement under penalties of perjury, certifying that such Non-U.S. Holder is not a U.S. person and providing the name and address of such Non-U.S. Holder. Absent such exemption, payments of interest, including any amounts paid or accrued in respect of accrued original issue discount, may be subject to withholding taxes, subject to reduction under any applicable tax treaty. Non-U.S. Holders are urged to consult their own tax advisors regarding the ownership, sale or other disposition of a Taxable Series 2015B Bond. The foregoing rules will not apply to exempt a U.S. shareholder of a controlled foreign corporation from taxation on the U.S. shareholder's allocable portion of the interest income received by the controlled foreign corporation. OTHER INFORMATION RATINGS Moody's Investors Service, Inc. ( Moody's ) and Standard & Poor's Ratings Services, a Standard & Poor s Financial Services LLC business ( S&P ) have assigned their municipal bond ratings of Aa1 and AAA, respectively, to the Bonds. An explanation of the significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only the respective views of such organizations and the City makes no representation as to the appropriateness of the ratings. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by either or both of such rating companies, if in the judgment of either or both companies, circumstances so warrant. Any such downward revision or withdrawal of such ratings, or either of them, may have an adverse effect on the market price and marketability of the Bonds. LITIGATION The City is a party to various lawsuits in the normal course of business. It is the opinion of the City Attorney and City Management that, except as described herein below, there is no pending litigation against the City that if decided adversely to the City, (i) would have a material adverse financial impact upon the City or its operations or (ii) would result in a judgment payable from System revenues. The City is a defendant in six lawsuits, including two class actions, arising from City Ordinance No , adopted on January 22, All of the lawsuits allege that current and past police and fire pay schedules were adopted in violation of a referendum approved by the voters in All Plaintiffs claim that the City failed to maintain percentage pay differentials between grades in the sworn ranks as required by the referendum, and seek compensation for alleged underpayments of salaries and loss of value of retirement benefits. It is the City s position that the 1979 referendum only mandated that pay raises be made in fiscal year and that there was no continuing obligation of the City to maintain pay scale differentials, as alleged by the plaintiffs. The City has asserted its governmental immunity and various special exceptions and affirmative defenses, and disputes the Plaintiffs allegations in all of the lawsuits. The Plaintiffs in Albert, et al. v. City of Dallas (Cause No ) ( Albert ) are 808 members of the Dallas Fire Department. The Plaintiffs in Arredondo, et al. v. City of Dallas (Cause No ) are 16 members of the Dallas Fire Department who were originally plaintiffs in Albert but whose claims were severed in October The Plaintiffs in Barber, et al. v. City of Dallas (Cause No ) are 71 members of the Dallas Fire Department. The Plaintiffs in Willis, et al, v. City of Dallas (Cause No ) are 772 members of the Dallas Police Department. Parker et al. v. City of Dallas (Cause No ) is a class action lawsuit. The Parker Plaintiff class consists of all current, past or future members of the sworn ranks of the Dallas Police Department, as well as their spouses, heirs or estates. Martin, et al. v. City of Dallas (Cause No ) is the other class action lawsuit. The Martin Plaintiff class consists of current, past and future members of the sworn ranks of the Dallas Fire Department, as well as their spouses, heirs or estates. Both of the class action lawsuits have been certified. In addition, in September 1999, the Dallas Police and Fire Pension System intervened in the lawsuits seeking contributions from both its members (Plaintiffs) and the City of Dallas in the event of a final judgment awarding back pay to Plaintiffs. In the two class action lawsuits, Parker and Martin, the Plaintiffs have alleged damages of approximately $94,000,000. The amount of alleged damages has not been specified in the other lawsuits. The Plaintiffs also seek an award of attorney fees in an unspecified amount in connection with their breach of contract and declaratory relief claims. Although the City has stated that the total recovery in the cases could exceed $1 billion, any estimate of damage at this stage in the litigation is speculative. Unless the current Court of 46

47 Appeals decision, as described below, is reversed, the City is not liable for back pay damages to the Plaintiffs and any damages would be significantly more limited. In August 1997, the trial court in Albert, the oldest of the cases, issued an order holding that the City had not maintained the percentage pay differentials between grades; however, the court also held that the remedy was within the City s discretion and that salaries could be either raised or lowered to conform to the appropriate percentage differentials. The City adopted a resolution implementing a remedy which was submitted to the court for approval. In May 1999, the court determined that the City s remedy was not adequate and, upon motion of 16 of the 824 Albert Plaintiffs, entered an Order Granting Partial Summary Judgment in favor of those 16 Plaintiffs, awarding damages of $1.7 million to the 16 Plaintiffs. Plaintiffs requested that the Court sever that portion of the case as to the 16 Plaintiffs and enter a final order in their favor. On October 20, 1999, the Court granted the Plaintiffs' motion for severance, making the Partial Summary Judgment final with respect to the 16 Plaintiffs, whose claims are now styled, Arredondo, et al v. City of Dallas (Cause No ). On October 28, 1999, the 16 Plaintiffs appealed the Court's Final Summary Judgment order based on the measure of damages issue and on January 4, 2000, the City appealed the Final Summary Judgment as to both liability and damages issues. The Arredondo appeal (No CV) was fully briefed and oral argument was held on November 28, On June 4, 2002, the Court of Appeals reversed the trial court s judgment and remanded the case to the trial court, holding that the ordinance is patently ambiguous and that resolution of the ambiguity (regarding whether the word maintain applies only to the one-time raise provided in the ordinance or also to all future pay scales) would be a question for the finder of fact based on contemporaneous evidence of the voters intent in passing the referendum. The Arredondo plaintiffs filed a petition for review in the Texas Supreme Court. That petition was denied. On December 21, 2006, the Court of Appeals reversed the trial courts in all six cases and upheld the City s governmental immunity from Plaintiffs breach-of-contract claims, including claims for declaratory relief to recover damages. However, the Court of Appeals affirmed the trial courts denial of the City s pleas regarding the Plaintiffs claims for prospective declaratory relief, and found it appropriate to allow Plaintiffs the opportunity to argue to the trial court that the legislature has waived immunity from suit for breach of contract under Texas Local Government Code sections to , which were enacted during the pendency of the appeals. In opinions on August 26, 2011, and December 16, 2011, the Texas Supreme Court reversed the court of appeals. The court held that the City has immunity from Plaintiffs requests for a declaratory judgment and that the adoption of an ordinance by referendum did not result in waiver or abrogation of the City s immunity. The court remanded the cases to the trial court to consider whether, by adding sections through to the Texas Local Government Code, the legislature waived the City s immunity. On remand in Albert, Arredondo, Barber, and Willis, the City filed pleas to the jurisdiction, asserting that Plaintiffs have not pleaded a written contract to invoke the waiver of the City s governmental immunity in the Local Government Code. The district court denied the pleas, and the City filed interlocutory appeals to the court of appeals for review of whether the City s immunity is waived under the Local Government Code. On August 13, 2013, the court of appeals reversed the denials in part and dismissed all Plaintiffs claims for declaratory relief and attorney fees, and affirmed the denials in part as to Plaintiffs breach-of-contract claims under section The City filed a petition for review with the Texas Supreme Court, which remains pending. The court requested briefs on the merits. The City filed its principal brief on August 1, Plaintiffs filed their brief on the merits on October 22, The City s reply brief was filed on January 7, The Texas Supreme Court has yet to rule on the City s petition for review. The City is a defendant in United States ex rel. Lockey et al. v. City of Dallas, et al., a qui tam False Claims Act lawsuit against the City, the Dallas Housing Authority, Dallas County, and the Dallas County Housing Agency. Curtis Lockey and Craig MacKenzie are the relators, claiming that each defendant falsely certified that it was affirmatively furthering fair housing when submitting applications for federal funds from the U.S. Department of Housing and Urban Development (HUD). Under their false certification legal theory, the relators contend that each defendant falsely obtained all HUD affordable housing funding received over the past six years. Thus, on behalf of the United States, relators claim that the City received more than $320 million based on the false claims and seek triple recovery of that sum and additional civil penalties against the City. They seek comparable dollar amounts based on the same formula from the other defendants. If the relators were to recover, the United States would receive the vast majority of the proceeds and the relators would receive the remainder. On February 3, 2010, the relators also filed a complaint with HUD that contains many of the same allegations that they have made in this lawsuit. In response to HUD s inquiries, the City provided information to HUD in March and May 2010 and has not received any further communication from HUD. The suit was originally filed under seal in February After receiving information from the City and the other defendants, the United States elected not to intervene. The court unsealed the case on November 14, 2011 and entered a partial scheduling order. Relators served the City on February 28, The City moved to dismiss for lack of jurisdiction because of prior litigation and administrative proceedings. On January 23, 2013, the district court granted the City s motion to dismiss. Relators filed a notice of appeal. On December 5, 2013, Relators filed a motion in district court seeking an indicative ruling based on HUD s November 22, 2013 letter of non-compliance. The district court denied the motion. Relators also appealed the denial of their indicative motion. The Fifth Circuit affirmed the trial court s judgment on August 4, 2014, and issued the mandate on August 24, However, on October 3, 2014, Relator filed a motion to amend complaint or to file new action. The City believes that the risk of liability is remote in this case. 47

48 The City Attorney recently publicly reported to the City Council that Dallas Fire-Rescue has misplaced approximately 14 laptops that may contain certain patient health information subject to privacy restrictions under the Health Insurance Portability and Accountability Act ( HIPAA ). Preliminary information has been conveyed to the U.S. Department of Health and Human Services (HHS) Office of Civil Rights ( OCR ), the agency that enforces HIPAA. The City expects OCR to conduct a compliance review and investigation and anticipates that there may be regulatory enforcement action that could result in a fine being assessed against the City. Since the City entered into several contracts with third party vendors as part of its plan to comply with the regulations, the City is investigating whether it may have claims against those third party vendors and, if so, the amount of damages that may be recoverable to the City. If the City is fined by HHS, it is undetermined: (1) when the HHS determination as to the imposition of a fine against the City will be made; (2) whether the City would appeal the HHS determination; and (3) if, or when, the City would pay the fine amount. Based on the limited facts known to the City at this stage of the investigation, the City does not believe the amount of any fine would have a material adverse financial impact on the City or its operations. FUTURE LEGISLATION The Texas Legislature is currently in session for its 84th Regular Session which runs through June 1, During the 84th Regular Legislative Session, the Texas Legislature may consider various legislation which could have a direct impact on the City and the System. The City can make no representations or predictions concerning the substance or effect of any legislation that may be proposed and ultimately passed in any regular or special session, or how any such legislation would affect the financial conditions of the City or the System, or its revenues or operations. CLEAN AIR ACT AMENDMENTS OF 1990 The USEPA has established certain air quality standards for the North Texas Region consisting of Dallas, Collin, Denton and Tarrant counties (the Region ). In 1993, the USEPA classified the Region as a non-attainment area under the USEPA s one-hour ozone standard. In 1998, the USEPA downgraded the Region from an area of moderate non-attainment to an area of serious non-attainment. The Region was required to meet the one-hour ozone standards by a June 15, 2005 attainment date. A Texas State Implementation Plan (SIP), developed under the one-hour ozone standard, proposed emission reduction strategies necessary to meet the air quality standards. Concurrently, the USEPA developed its newer 8-hour clean air standards (based upon a different testing methodology). On April 15, 2004, the USEPA promulgated the new 8-hour standard, which also had the effect of enlarging the non-attainment Region by adding Ellis, Johnson, Kaufman, Parker and Rockwall counties (such counties, together with the Region, being the North Texas Region ), as well as revoking the previous one-hour standard. The new 8-hour standard required TCEQ to develop a new SIP by June 2007 that would show attainment of the standard by The 8-hour rule also established new guidelines for areas that had not met their legal obligations under the previous one-hour standard. The option chosen by TCEQ was to propose a 5% Rate of Progress SIP by June 2005 that would establish a schedule of at least a 5% decrease in levels of NOx, thereby leading the way for compliance of the new standard. The TCEQ approved this 5% Rate of Progress SIP and submitted it to the USEPA in June As a result of this submission, the area has now complied with its previous one-hour standard requirements. The finalization of the 8-hour standard and revocation of the one-hour standard also contributed to the resolution of a lawsuit brought by environmental groups against the USEPA for its failure to either approve or disapprove a SIP under the previous one-hour standard. In October 2004, a case styled Blue Skies Alliance et al. v. Leavitt was filed by four citizens groups in the U.S. District Court in Dallas, Texas. The suit sought to require the USEPA to either approve or disapprove the SIP submitted under the one-hour standard. The practical effect of the suit could have required the DFW area to a higher severe classification and cause disruption of all planning for federally funded highway projects in the region. However, the suit was settled and the USEPA agreed to a consent decree that proposed to approve some additional air quality measures submitted by the State, as well as additional studies on point source controls to be conducted by TCEQ. The TCEQ has also identified new control measures for consideration for the nine county area as well as certain regional controls. On December 13, 2006, the TCEQ presented a proposed plan to its Commissioners. That plan was formally adopted by the TCEQ Commissioners on May 26, On March 12, 2008, the USEPA revised the 8-hour ozone national ambient air quality standard. The new standard was established at 75 parts per billion ( ppb ). Due to the revision, new designations of ozone nonattainment were required by the Clean Air Act. States are to recommend to the USEPA nonattainment areas and boundaries by March 2009, and the USEPA was required by the Clean Air Act to finalize the designations by March On May 21, 2012, the USEPA designated the 10-county DFW area as moderate nonattainment with respect to the 8-hour ozone standard. In response, TCEQ proposed SIP revisions that were accepted in part and denied in part by the USEPA. Communication between TCEQ and the USEPA regarding these issues is ongoing. The attainment deadline for the 8-hour ozone standard is December 31,

49 On July 14, 2008, the USEPA proposed conditional approval of the hour ozone attainment demonstration SIP revisions for the Dallas/Fort Worth area submitted to the USEPA by the State of Texas on May 30, 2007 and supplemented on April 23, The USEPA s action was published in the Federal Register on July 14, 2008 at 73 FR The USEPA also proposed on July 11, 2008 a finding that the DFW area is currently attaining the 1-hour ozone standard. Details of this action are found in the Federal Register of July 11, 2008 at 73 FR In February 2009, the USEPA approved the hour ozone attainment demonstration SIP revisions for the Dallas/Fort Worth area. Details of this action are found in the Federal Register of January 14, 2009 at 74 FR However, in January 2010, the USEPA proposed to further strengthen the national ambient air quality standards for ground level ozone from the current standard 39 of 75 ppb. The USEPA has proposed to change the standard to a level between 60 ppb and 70 ppb. The USEPA has yet to change the standard. In May 2014, the Sierra Club filed a lawsuit against the USEPA in a federal district court in the District of Columbia seeking to require the USEPA to reclassify part or all of the DFW non-attainment area as being in severe or extreme nonattainment for ozone. Such a reclassification could have a significant effect on local businesses and economic development. The parties to the lawsuit have lodged a proposed consent decree with the court. The consent decree does not include a requirement that the USEPA immediately reclassify the Dallas/Fort Worth non-attainment area for ozone, but rather sets forth a timeframe for the USEPA to act on several ozone-related issues. The proposed consent decree does not dictate that the USEPA takes any particular action. CONTINUING DISCLOSURE OF INFORMATION In each Ordinance, the City has made the following agreement for the benefit of the holders and beneficial owners of the Bonds. The City is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the City will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified events, to the MSRB. This information will be available free of charge from the MSRB via the Electronic Municipal Market Access ("EMMA") system at ANNUAL REPORTS...TheCitywillprovidecertainupdated financial information and operating data to EMMA annually. The information to be updated includes all quantitative financial information and operating data with respect to the City of the general type included in this Official Statement under Tables numbered 1 through 17, and in Appendix C. The City will update and provide this information within six months after the end of each fiscal year. The City will provide the updated information to the MSRB through the EMMA information system in accordance with Rule 15c2-12 (the Rule ) promulgated by the SEC. The City may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by the Rule. The updated information will include audited financial statements, if the City commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the City will provide notice that the audited financial statements are not available and provide unaudited financial information of the type described in the tables described in the previous paragraph by the required time and audited financial statements when and if the audit report becomes available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix C or such other accounting principles as the City may be required to employ from time to time pursuant to state law or regulation. The City s current fiscal year end is September 30. Accordingly, it must provide updated information by March 31 in each year, unless the City changes its fiscal year. If the City changes its fiscal year, it will notify the MSRB of the change. DISCLOSURE EVENT NOTICES... The City shall notify the MSRB, in a timely manner not in excess of ten Business Days after the occurrence of the event, of any of the following events with respect to the Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; (7) modifications to rights of holders of the Bonds, if material; (8) Bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the City; (13) the consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor Paying Agent/Registrar or change in the name of the Paying Agent/Registrar, if material. (Neither the Bonds nor the Ordinances make any provision for liquidity enhancement.) As used in clause 12 above, the phrase "bankruptcy, insolvency, receivership or similar event" means the appointment of a receiver, fiscal agent or similar officer for the City in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the City, or if jurisdiction has been assumed by leaving the 49

50 City Council and official or officers of the City in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City. LIMITATIONS AND AMENDMENTS...TheCityhasagreedtoupdateinformationandtoprovidenoticesofspecifiedeventsonlyas described above. The City has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The City makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The City disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Bonds may seek a writ of mandamus to compel the City to comply with its agreement. The City may amend its continuing disclosure agreement from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the City, if (i) the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the offering described herein in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (ii) either (a) the holders of a majority in aggregate principal amount of the outstanding Bonds consent to the amendment or (b) any person unaffiliated with the City (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Bonds. If the City so amends the agreement, it has agreed to include with the next financial information and operating data provided in accordance with its agreement described above under ANNUAL REPORTS an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided. COMPLIANCE WITH PRIOR UNDERTAKINGS... The City has been in compliance, in all material respects, during the last 5 years with its undertakings under the Rule. The City did not make an event filing with respect to downgrades of the ratings on insurance on certain outstanding waterworks and sewer system revenue bonds issued by the City that was obtained from Financial Security Assurance, Inc. ( FSA ), including insurance obtained by the City in connection with its Waterworks and Sewer System Revenue Refunding and Improvement Bonds, Series 2003 (the Series 2003 Bonds ). The Series 2003 Bonds are no longer outstanding. The City determined that the downgrade in ratings of the FSA were a matter of public record, and therefore were not material in respect to the Series 2003 Bonds and other waterworks and sewer system revenue bonds which the purchaser obtained insurance for certain maturities thereof (the City s Waterworks and Sewer System Revenue Refunding Bonds, Series 2005, which are no longer withstanding, and the City s Waterworks and Sewer System Revenue Refunding and Improvement Bonds, Series 2006). The City has identified instances in which certain segments of the Dallas-Fort Worth International Airport s annual financial information for Fiscal Years 2009 and 2010, which the City believes are immaterial to the operations and financial condition of the Airport, were filed through incorporation by reference to Official Statements after the scheduled annual filing date for the respective years. Consolidation of tables and audited financial information in one document filing since Fiscal Year 2012 further assures timely and complete annual filings. REGISTRATION AND QUALIFICATION OF BONDS FOR SALE The sale of the Bonds has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Bonds have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been qualified under the securities acts of any other jurisdiction. The City assumes no responsibility for qualification of the Bonds under the securities laws of any jurisdiction in which the Bonds may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibilityfor qualification for sale or other disposition of the Bonds shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section of the Public Security Procedures Act (Chapter 1201, Texas Government Code) provides that the Bonds are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State. With respect to investment in the Bonds by municipalities or other political subdivisions or public agencies of the State, the PFIA, requires that the Bonds be assigned a rating of not less than A or its equivalent as to investment quality by a national rating agency. See OTHER INFORMATION Ratings above. In addition, various provisions of the Texas Finance Code provide that subject to a prudent investor standard, the Bonds are legal investments for state banks, savings bank, trust companies with capital of one million dollars or more, and savings and loan associations. The Bonds are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of 50

51 their market value. No review by the City has been made of the laws in other states to determine whether the Bonds are legal investments for various institutions in those states. LEGAL OPINIONS The City will furnish to the Underwriters a complete transcript of proceedings incident to the authorization and issuance of the Bonds, including the unqualified approving legal opinion of the Attorney General of Texas approving the Bonds and to the effect that the Bonds are valid and legally binding special obligations of the City, and based upon examination of such transcript of proceedings, the approving legal opinions of Co-Bond Counsel, to like effect and to the effect that, with respect to the Series 2015A Bonds, the interest on the Series 2015A Bonds will be excludable from gross income for federal income tax purposes under Section 103(a) of the Code, subject to the matters described under TAX MATTERS, including the alternative minimum tax on corporations. Co-Bond Counsel s opinions will be delivered on the date of delivery of each series of the Bonds. See Appendix D Forms of Co-Bond Counsel s Opinions. Co-Bond Counsel from time to time represents the Co-Financial Advisors and the members of the underwriting syndicate in matters not related to the Bonds. Co-Bond Counsel were not requested to participate, and did not take part, in the preparation of the Official Statement, and such firms have not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained therein, except that, in capacity as Co-Bond Counsel, such firms have reviewed the information under the captions PLAN OF FINANCING, THE BONDS (exclusive of the subcaptions Book-Entry-Only System, Sources and Uses of Funds and Bondholders Remedies ), TAX MATTERS and the subcaptions Continuing Disclosure of Information (exclusive of the heading Compliance with Prior Undertakings ), Legal Investments and Eligibility to Secure Public Funds in Texas and Legal Opinions under the caption OTHER INFORMATION in the Official Statement and Appendix B thereto, and Co-Bond Counsel is of the opinion that the information relating to the Bonds and the legal issues contained under such captions and subcaptions is an accurate and fair description of the laws and legal issues addressed therein and, with respect to the Bonds, such information conforms to the Ordinances. The legal fees to be paid to Co-Bond Counsel for services rendered in connection with the issuance of the Bonds are contingent on the sale and delivery of the Bonds. In connection with the transaction described in this Official Statement, Co-Bond Counsel represents only the City. The legal opinion will accompany the Bonds deposited with DTC or will be printed on the Bonds in the event of the discontinuance of the Book-Entry- Only System. Certain legal matters will be passed upon for the Underwriters by their Co-Counsel, Locke Lord LLP, Dallas, Texas and White & Wiggins, LLP, Dallas, Texas. The legal fees to be paid to co-counsel to the Underwriters for services rendered in connection with the issuance of the Bonds are contingent on the sale and delivery of the Bonds. The legal opinions to be delivered concurrently with the delivery of the Bonds express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of that expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction, nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction. VERIFICATION OF ARITHMETICAL AND MATHEMATICAL COMPUTATIONS The arithmetical accuracy of certain computations included in the schedules provided by First Southwest Company, LLC and Estrada, Hinojosa & Company, Inc. on behalf of the City relating to (a) computation of forecasted receipts of principal and interest on the Escrowed Securities to the forecasted payments of principal and interest to redeem the Refunded Bonds and (b) computation of the yields of the Series 2015A Bonds and the Escrowed Securities were verified by the Verification Agent. Such computations were based solely on assumptions and information supplied by First Southwest Company, LLC and Estrada, Hinojosa & Company, Inc. on behalf of the City. The Verification Agent has restricted its procedures to verifying the arithmetical accuracy of certain computations and has not made any study or evaluation of the assumptions and information on which the computations are based and, accordingly, has not expressed an opinion on the data used, the reasonableness of the assumptions, or the achievability of the forecasted outcome. Such verification will be relied upon by Co-Bond Counsel in rendering its opinions with respect to the exclusion from gross income of interest on the Series 2015A Bonds for federal income tax purposes and with respect to defeasance of the Refunded Bonds. UNDERWRITING The Underwriters have agreed, subject to certain conditions, to purchase the Series 2015A Bonds from the City, at a purchase price of par, plus a premium of $69,062,949.15, and less an underwriting discount of $1,740, The Underwriters will be obligated to purchase all of the Series 2015A Bonds if any Series 2015A Bonds are purchased. The Underwriters have agreed, subject to certain conditions, to purchase the Taxable Series 2015B Bonds from the City, at a purchase price of par, less an underwriting discount of $439, The Underwriters will be obligated to purchase all of the Taxable Series 2015B Bonds if any Taxable Series 2015B Bonds are purchased. 51

52 The Bonds to be offered to the public may be offered and sold to certain dealers (including the Underwriters and other dealers depositing Bonds into investment trusts) at prices lower than the public offering prices of such Bonds, and such public offering prices may be changed, from time to time, by the Underwriters. J.P. Morgan Securities LLC ( JPMS ), one of the Underwriters of the Bonds, has entered into a negotiated dealer agreement (the Dealer Agreement ) with Charles Schwab & Co., Inc. ( CS&Co. ) for the retail distribution of certain securities offerings, including the Bonds, at the original issue prices. Pursuant to the Dealer Agreement, CS&Co. will purchase Bonds from JPMS at the original issue price less a negotiated portion of the selling concession applicable to any Bonds that CS&Co. sells. Morgan Stanley, parent company of Morgan Stanley & Co. LLC., an underwriter of the Bonds, has entered into a retail distribution arrangement with its affiliate Morgan Stanley Smith Barney LLC. As part of the distribution arrangement, Morgan Stanley & Co. LLC may distribute municipal securities to retail investors through the financial advisor network of Morgan Stanley Smith Barney LLC. As part of this arrangement, Morgan Stanley & Co. LLC may compensate Morgan Stanley Smith Barney LLC for its selling efforts with respect to the Bonds. Siebert Brandford Shank & Co., L.L.C., one of the Underwriters of the Bonds, has entered into a separate agreement with Credit Suisse Securities USA LLC for retail distribution of certain municipal securities offerings, at the original issue prices. Pursuant to said agreement, if applicable to the Bonds, Siebert Brandford Shank & Co., L.L.C. will share a portion of its underwriting compensation with respect to the Bonds, with Credit Suisse Securities USA LLC. Certain of the Underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, principal investment, hedging, financing and brokerage activities. Certain of the Underwriters and their respective affiliates have, from time to time, performed and may in the future perform various investment banking services for the City for which they received or will receive customary fees and expenses. In the ordinary course of their various business activities, the Underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities, which may include credit default swaps) and financial instruments (including bank loans) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve securities and instruments of the City. The Underwriters have reviewed the information in the Official Statement in accordance with their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. CO-FINANCIAL ADVISORS First Southwest Company, LLC and Estrada Hinojosa & Company, Inc. are employed as Co-Financial Advisors to the City in connection with the issuance of the Bonds. The Co-Financial Advisors' fees for services rendered with respect to the sale of the Bonds is contingent upon the issuance and delivery of the Bonds. First Southwest Company, LLC and Estrada Hinojosa & Company, Inc. have agreed, in their Co-Financial Advisor contracts with the City, not to bid for the Bonds, either independently or as a member of a syndicate organized to submit a bid for the Bonds. First Southwest Company, LLC and Estrada Hinojosa & Company, Inc., in their capacity as Co-Financial Advisors, have relied on the opinion of Co-Bond Counsel and have not verified and do not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Bonds or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies. In the normal course of business, the Co-Financial Advisors may from time to time sell investment securities to the City for the investment of bond proceeds or other funds of the City upon the request of the City. The Co-Financial Advisors to the City have provided the following sentence for inclusion in this Official Statement. The Co- Financial Advisors have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to the City and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Co-Financial Advisors do not guarantee the accuracy or completeness of such information. FORWARD-LOOKING STATEMENTS The statements contained in this Official Statement, and in any other information provided by the City, that are not purely historical, are forward-lookingstatements, includingstatements regardingthecity's expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward looking statements included in this Official Statement are based on information available to the City on the date hereof, and the City assumes no obligation to update any such forward-looking statements. It is important to note that the City's actual results could differ materially from those in such forward-looking statements. 52

53 The forward-looking statements herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the City. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement would prove to be accurate. Each Ordinance approves the form and content of this Official Statement, and any addenda, supplement or amendment hereto, authorizes designated officials of the City to complete this Official Statement, and authorizes its further use in the reoffering of the Bonds by the Underwriters. A.C. GONZALEZ City Manager City of Dallas, Texas ATTEST: JEANNE CHIPPERFIELD Chief Financial Officer ROSA A. RIOS City Secretary 53

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55 SCHEDULE OF REFUNDED BONDS SCHEDULE I $255,375,000 Waterworks and Sewer System Revenue Refunding and Improvement Bonds, Series 2006 Dated April 1, 2006 To be refunded with proceeds of the Series 2015A Bonds Principal Principal Maturity Date Interest Rate Outstanding Refunded Call Date Call Price 10/1/ % $ 12,425,000 $ 12,425,000 (1) 10/1/ % 10/1/ % 13,060,000 13,060,000 (1) 10/1/ % 10/1/ % 13,730,000 13,730,000 (1) 10/1/ % 10/1/ % 14,435,000 14,435,000 (1) 10/1/ % $ 53,650,000 $ 53,650,000 (1) Represents a Term Bond with mandatory sinking fund payments starting on October 1, 2032, and final maturity on October 1, $678,480,000 Waterworks and Sewer System Revenue Refunding Bonds, Series 2007 Dated March 15, 2007 To be refunded with proceeds of the Series 2015A Bonds and Taxable Series 2015B Bonds Principal Principal Maturity Date Interest Rate Outstanding Refunded Call Date Call Price 10/1/ % $ 43,680,000 $ 12,330,000 10/1/ % 10/1/ % 42,175,000 42,175,000 10/1/ % 10/1/ % 40,110,000 40,110,000 10/1/ % 10/1/ % 32,125,000 32,125,000 10/1/ % 10/1/ % 22,885,000 22,885,000 10/1/ % 10/1/ % 23,925,000 23,925,000 10/1/ % 10/1/ % 15,155,000 15,155,000 10/1/ % 10/1/ % 15,835,000 15,835,000 10/1/ % 10/1/ % 16,555,000 4,675,000 10/1/ % 10/1/ % 17,305,000 4,885,000 10/1/ % $ 269,750,000 $ 214,100,000

56 SCHEDULE OF REFUNDED BONDS SCHEDULE I (Continued) $158,655,000 Waterworks and Sewer System Revenue Refunding Bonds, Series 2008 Dated May 15, 2008 To be refunded with proceeds of the Series 2015A Bonds Principal Principal Maturity Date Interest Rate Outstanding Refunded Call Date Call Price 10/1/ % $ 3,990,000 $ 3,990,000 10/1/ % 10/1/ % 4,195,000 4,195,000 10/1/ % 10/1/ % 4,410,000 4,410,000 10/1/ % 10/1/ % 4,635,000 4,635,000 10/1/ % 10/1/ % 4,875,000 4,875,000 10/1/ % 10/1/ % 5,125,000 5,125,000 10/1/ % 10/1/ % 5,390,000 5,390,000 10/1/ % 10/1/ % 5,665,000 5,665,000 10/1/ % 10/1/ % 5,955,000 5,955,000 10/1/ % 10/1/ % 6,260,000 6,260,000 10/1/ % 10/1/ % 6,580,000 6,580,000 10/1/ % 10/1/ % 6,920,000 6,920,000 10/1/ % 10/1/ % 7,275,000 (1) 7,275,000 10/1/ % 10/1/ % 7,645,000 (1) 7,645,000 10/1/ % 10/1/ % 8,040,000 (1) 8,040,000 10/1/ % 10/1/ % 8,450,000 (2) 8,450,000 10/1/ % 10/1/ % 8,885,000 (2) 8,885,000 10/1/ % $ 104,295,000 $ 104,295,000 (1) Represents a Term Bond with mandatory sinking fund payments starting on October 1, 2031 and final maturity on October 1, (2) Represents a Term Bond with mandatory sinking fund payments starting on October 1, 2034 and final maturity on October 1, $295,850,000 Waterworks and Sewer System Revenue Refunding Bonds, Series 2010 Dated June 15, 2010 To be refunded with proceeds of the Series 2015A Bonds Principal Principal Maturity Date Interest Rate Outstanding Refunded Call Date Call Price 10/1/ % $ 9,880,000 $ 7,485,000 10/1/ % 10/1/ % 10,380,000 7,865,000 10/1/ % 10/1/ % 10,915,000 8,270,000 10/1/ % 10/1/ % 11,465,000 8,685,000 10/1/ % 10/1/ % 12,045,000 9,125,000 10/1/ % $ 54,685,000 $ 41,430,000

57 APPENDIX A GENERAL INFORMATION REGARDING THE CITY

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59 LOCATION AND POPULATION...The City of Dallas is located in north central Texas approximately 300 miles north of the Gulf of Mexico. It is among the three largest cities in Texas and among the ten largest cities in the United States. Dallas is the county seat of Dallas County. Dallas County encompasses an area of 880 square miles while the City of Dallas contains approximately 378 square miles. The City of Dallas corporate land extends into Collin, Denton and Rockwall Counties. POPULATION TOTALS ARE: Estimate Estimate Estimate Estimate Estimate City 1,213,600 1,207,420 1,200,530 1,197,816 (2) 1,306,350 County 2,480,331 2,453,843 2,380,510 2,492,850 2,471,000 Metro Stat Area (1) 6,812,373 6,647,496 6,526,548 6,402,922 6,447,228 (1) Metropolitan Statistical Area (MSA) is a twelve-county area which includes Collin, Dallas, Delta, Denton, Ellis, Hunt, Johnson, Kaufman, Parker, Rockwall, Tarrant, and Wise Counties. (2) U.S. Census. Sources: U.S. Census Bureau-American Fact Finder; North Central Texas Council of Governments. ESTIMATED PER CAPITA INCOME Dallas MD (1) $ 48,591 $ 48,069 $ 45,404 $ 42,943 $ 41,948 Dallas County 48,638 48,127 45,402 43,178 42,088 Texas 43,552 42,638 40,147 37,747 36,500 U.S. 44,543 43,735 41,560 39,937 38,846 (1) Metropolitan Division (MD) is an eight-county area which includes Collin, Dallas, Delta, Denton, Ellis, Hunt, Kaufman, and Rockwall Counties. Sources: U.S. Department of Commerce; Bureau of Economic Analysis. GOVERNMENT ORGANIZATION...The City of Dallas operates under a Council-Manager form of government. There are fourteen single-district council members and a mayor elected at large. The Mayor and Council appoint the City Manager, City Attorney, City Auditor, City Secretary, City Treasurer and the Municipal Court Judges. The City Manager appoints all other department directors except two appointed by the Civil Service Board and the Park and Recreation Board. The Mayor is elected to a four-year term and is limited to two consecutive four-year terms. Council members are elected for two-year terms and can serve up to four consecutive two-year terms. The Mayor and City Council set the public agenda, adopt policy and laws and appoint the City Manager, who acts as chief executive, responsible for implementing council policy. The City Manager oversees City operations with an executive team of assistant city managers, each of whom has responsibility for various departments. The City organization has approximately 13,000 full-time employees. CITY SERVICES AND FACILITIES...The City provides the full range of municipal services contemplated by statute or charter. This includes public safety (police and fire), streets, sanitation, health and human services, culture and recreation, public improvements, planning and zoning, and general administrative services. In addition to general government activities, the Dallas Water Utilities, Municipal Airport (Love Field), Convention Center, Municipal Radio and several other enterprise and internal service fund activities are a part of the City s legal entity. A-1

60 EMPLOYMENT DATA...A diverse economy and highly-skilled work force contribute to the strengths of the City. Dallas is a center for high technology, retail and wholesale trade, finance, major medical facilities, culture and recreation and a convention and visitor destination. The following exhibits show the City s civilian employment over the last several years, the employment by sector and the major employers within the Dallas area. EMPLOYMENT STATISTICS December December December December December Civilian Labor Force (City of Dallas) 602, , , , ,156 Civilian Labor Force (Dallas MD*) 2,323,807 2,273,714 2,243,969 2,206,155 2,182,110 Total Employed (City of Dallas) 575, , , , ,742 Total Employed (Dallas MD*) 2,229,463 2,148,096 2,105,272 2,051,807 2,010,340 Total Unemployed (City of Dallas) 26,303 35,155 39,113 44,999 49,414 Total Unemployed (Dallas MD*) 94, , , , ,770 % Unemployed (City of Dallas) 4.4% 6.0% 6.7% 7.8% 8.6% % Unemployed (Dallas MD*) 4.1% 5.5% 6.2% 7.0% 7.9% % Unemployed (Dallas County) 4.4% 6.0% 6.6% 7.6% 8.5% % Unemployed (Texas) 4.1% 5.6% 6.3% 7.1% 8.0% % Unemployed (U.S.) 5.4% 6.5% 7.6% 8.3% 9.1% * Metropolitan Division (MD) is an eight-county area which includes Collin, Dallas, Delta, Denton, Ellis, Hunt, Kaufman, and Rockwall Counties. Source: Bureau of Labor Statistics. AVERAGE ANNUAL UNEMPLOYMENT RATES City of Dallas 5.5% (2) 6.8% 7.7% 8.7% 8.7% Dallas - MD (1) 5.1% (2) 6.3% 7.1% 8.0% 8.2% State of Texas 5.2% (2) 6.4% 7.1% 8.1% 8.2% United States 6.2% 7.4% 8.3% 9.2% 9.7% (1) Dallas-Plano-Irving Metropolitan Division (MD) is an eight-county area which includes Collin, Dallas, Delta, Denton, Ellis, Hunt, Kaufman, and Rockwall Counties. (2) Preliminary. Sources: Texas Workforce Commission; U.S. Bureau of Labor Statistics. MAJOR DALLASAREAEMPLOYERS Number of Local Company Product/Service Employees Wal-Mart Stores Inc Retailer 52,700 American Airlines Airline 23,700 Baylor Health Care System Health Care 22,000 Dallas Independent School District Education 20,793 Texas Health Resources Health Care 16,205 Bank of America Financial Services 15,400 JPMorgan Chase Financial Services 13,000 Texas Instruments Inc. Semiconductor Design and Manufacturing 13,000 City of Dallas City Government 13,000 Lockheed Martin Aeronautics Semiconductor Design and Manufacturing 13, ,798 Source: The Dallas Business Journal Book of Lists 2015 (July 18, 2014). A-2

61 DALLAS PLANO -IRVINGMETROPOLITAN DIVISION---NON-AGRICULTURAL WAGE ANDSALARYEMPLOYMENT BYSECTOR 2013 Average Annual 2012 Average Annual Industry (1) Employment Percentage Employment Percentage Trade, Transportation, & Utilities 430, % 412, % Professional, Business Services 392, % 359, % Health, Educational Services 270, % 271, % Government 266, % 261, % Leisure and Hospitality 211, % 205, % Financial Services 163, % 166, % Manufacturing 153, % 186, % Natural Resources & Mining and Construction 117, % 104, % Other Services 76, % 72, % Informaiton 64, % 65, % Non-farm Total 2,142, % 2,101, % (1) Dallas-Plano-Irving Metropolitan Division (MD) is an eight-county area which includes Collin, Dallas, Delta, Denton, Ellis, Hunt, Kaufman, and Rockwall Counties. Sources: Texas Workforce Commission; U.S. Bureau of Labor Statistics. OFFICE AND INDUSTRIAL SPACE OCCUPANCY RATES...The City of Dallas office market consists of 117 million square feet of space. Average rents are on the rise, and have surpassed their 2008 high of over $20 per square foot reaching $20.90 per square foot. As of October 2014, over 1.6 million square feet of new office space is under construction citywide. The current citywide vacancy rate is 18.0 percent. The City is committed to the long-term health of the Central Business District (CBD). A number of public/private projects have been recently completed: Klyde Warren Park, the expanded Dallas Arts District, the Omni Dallas Convention Center Hotel and Belo Garden Park. Construction began in March 2013 on a modern streetcar system to improve mobility between the CBD and North Oak Cliff. The current CBD office vacancy rate is 28.1 percent. The market consists of 33.8 million square feet, which is the lowest inventory since the end of The decline is largely attributable to obsolete inventory taken off the market for residential conversions and other uses, such as parks. As of October 2014, average rents are $21.82 per square foot. Industrial/distribution building activity has picked up, with 198 million square feet of new space delivered as of October Available space is tightening, with only 7.3 percent vacant in October Source: City of Dallas Department of Economic Development (as of October 1, 2014). CONSTRUCTION VALUATION/BUILDING PERMIT ACTIVITY** Valuation ($000) Residential $ 1,574,178 $ 1,270,705 $ 1,060,472 $ 673,100 $ 650,387 $ 481,664 Commercial 1,792,730 1,402,317 1,249,854 2,426,771 1,308,526 1,381,078 Total $ 3,366,908 $ 2,673,022 $ 2,310,326 $ 3,099,871 $ 1,958,913 $ 1,862,742 Source: City of Dallas Building Inspection Division Other is reflected in Commercial. These valuations are based on all building permit activity inclusive of single trade permits, new residential and new non-residential construction, residential and non-residential rehabilitation with additions considered as new construction. Excluded are sign permits, barricades, excavations, demolitions, moving permits and tents. ** Permit data is fluid and may fluctuate for the following reasons after the initial data is reported: 1) Permit cancellations. 2) Permit addendums; reductions or augmentations to the original plans submitted that change the valuation of the project. 3) Periodic audits that correct data entry errors after the reporting period has closed. A-3

62 TRANSPORTATION...Dallas success as a leader in transportation is a result of its excellent airports, rail routes, and interstate highway systems. Positioned centrally to both the east and west coasts, Dallas is easily accessible to all areas of the United States, Mexico and Canada. Direct flight time to any North American city takes less than four hours. In addition, Dallas is the center point between North America s five largest business centers - New York, Los Angeles, Chicago, Mexico City and Toronto. Dallas/Fort Worth International Airport is a major contributor to the City's diversified economy. It is among the world s busiest airports in terms of total operation ranked fourth in the world. Approximately 60 million passengers traveled through the airport for the previous 12 months, as of August Dallas Love Field, located seven miles north of the Central Business District, is also extremely valuable to the Dallas economy. Approximately 8.6 million passengers were carried at Love Field during It acts as a catalyst for business by providing valuable scheduled air carrier and general aviation transportation services, and attracting and serving major companies that assemble, overhaul and maintain aircraft. Love Field began major renovation to the facility starting in The Love Field Modernization Program (LFMP) will increase efficiency for travelers while maintaining the convenience that Love Field currently offers passengers. In the new modernization design, the terminal will decrease in size approximately 25 percent by replacing a large amount of unused and outdated space with modern and efficient facilities. The three original concourses will be demolished and consolidated into one convenient, centrally located concourse for all airlines. Dallas Executive Airport, formerly known as Redbird Airport, is a public airport located six miles (10 km) southwest of the central business district (CBD) of the City of Dallas, in Dallas County, Texas, USA. The airport is used entirely for general aviation purposes and serves as a reliever airport for Dallas Love Field. It has two runways, the longest being 6,451 feet long by 150 feet wide. Facilities at the airport include a restaurant, a conference center, Fixed Based Operators and aircraft Hangar and tie-down areas. The airport is home to approximately 126 individual, enclosed T-hangars. The Dallas Vertiport is a Facility located at the Dallas Convention Center at the Central Business District and built to accommodate helicopters and tiltrotor type aircraft. It has two landing areas with independent approaches and facilities for flight planning and meetings and 5 tie-down areas. Dallas has a well-developed highway system. There are five interstate highways which run north/south and east/west including a loop freeway encompassing the City. Dallas has 19 other major U.S. and state highways. Dallas is a principal trucking and freight distribution center with approximately 120 trucking companies. Overnight pickup and delivery services are available to most cities. Dallas is a major hub for hundreds of rail routes. Major railroads that serve the Dallas area include Burlington Northern Santa Fe Railway, Kansas City Southern Railway and Union Pacific. Amtrak provides passenger train service at Union Station in downtown Dallas with three lines: Chicago, Los Angeles, and San Antonio. The City is part of an integrated regional mass transit system Dallas Area Rapid Transit (DART). DART consists of the City of Dallas and 13 cities and is funded by a 1.0% local sales tax assessed in the cities within the service area as well as fare revenues and federal funds for certain capital projects. The DART Service Area is approximately 700 square miles. The DART Transit System Plan is designed to provide a balanced combination of transit services and facilities to meet the region s mobility needs. DART s mission is made both difficult and necessary by the size and sprawl of the metroplex. Unlike some cities that funnel transportation into the central business district, the metroplex has multiple cores that have developed in suburban communities and along existing transportation routes. These mini-hubs complicate transportation service requirements and necessitate a range of mobility programs. DART provides fixed-route bus service with a total of 612 vehicle fleet from three DART-owned facilities. DART currently operates 85 miles of light rail. A 34-mile commuter rail service between downtown Dallas and Fort Worth is operated jointly by DART and the Fort Worth Transportation Authority. Additionally, DART operates and maintains 75 freeway miles of highoccupancy vehicle (HOV) lanes and provides Paratransit service to more than 11,550 riders. Sources: Greater Dallas Chamber; The Dallas Facts; Dallas Area Rapid Transit (DART); the City of Dallas, Dallas/Fort Worth International Airport. A-4

63 EDUCATION...The Dallas Independent School District (DISD) had approximately 159,713 students enrolled for the school year. DISD has 224 schools, including four elementary school vanguards (magnets), one elementary school vanguard/middle school academy, two Montessori schools, six magnet middle/high schools, one middle school academy/magnet high school, and two high school/magnet high schools. In May 2008, a $1.35 billion bond program was approved to build fifteen new schools, 177 new classrooms in existing schools and additional renovations. There are 48 college and university campuses in the Dallas metroplex area, enrolling over 220,000 students. Twenty-six campuses offer 4-year undergraduate degree programs, 19 offer 2-year associate degree programs and 22 offer advanced degrees. Sources: Dallas Independent School District; Greater Dallas Chamber, The Dallas Facts. MEDICAL...The Dallas metropolitan area is a major medical center providing "state-of-the-art" equipment and facilities. There are 24 general hospitals in Dallas County which are licensed for nearly 8,000 beds. In addition, there are two pediatric, two psychiatric and several long-term/rehabilitation hospitals. As a complement to its excellent medical treatment facilities, Dallas is becoming a leading force in biomedical research. The University of Texas Southwestern Medical Center at Dallas has five Nobel Prize winners on the faculty and staff. Nationally recognized medical and dental schools in Dallas include University of Texas Southwestern Medical Center, Texas A&M University System - Baylor College of Dentistry and Baylor University School of Nursing. Sources: The University of Texas Southwestern Medical Center at Dallas; The Texas State Board of Medical Examiners. TOURISM...According to the Dallas Convention and Visitors Bureau, Dallas ranks among the top convention cities in the nation. April 24, 2013 City Council renamed the Dallas Convention Center the Kay Bailey Hutchison Convention Center, which has the largest convention center of its kind in Texas with approximately 1.0 million square feet of total space. There are 96 meeting rooms and over one million square feet of exhibit space. The convention center also boasts the world s largest columnfree exhibit hall and a fully equipped theater along with catering capabilities and a cafeteria. The Center has both open and covered parking and the facilities include a Heliport/Vertiport. Dallas is one of the leading convention cities in the nation, attracting nearly four million convention delegates who contribute in excess of $4 billion to the local economy while attending more than 3,600 conventions a year. Dallas is the number one visitor and leisure destination in Texas. Annually, more than 30 million people visit metropolitan Dallas. The Dallas area annually receives $9.6 billion from visitors. There are approximately 65,000 hotel rooms. On September 15, 2009, City broke ground on the 23-story Omni Dallas Convention Center Hotel. The 1,000 room hotel opened November 11, The Dallas Convention & Visitors Bureau has received commitments for meetings totaling 400,000 definite room nights for groups committed to Dallas for future years using the Omni Dallas Convention Center hotel. Source: Dallas Convention Center; Dallas Convention and Visitors Bureau. RECREATION...Dallas offers numerous recreational, cultural and entertainment opportunities. Within the City are 374 public parks and open spaces covering 23,331 acres plus 4,400 surface acres of water. There are over 60 lakes and reservoirs within 100 miles of Dallas covering more than 550,000 acres and four state parks within an hour of Dallas. There are 39 private and 34 municipal golf courses in the area. The Dallas metropolitan area hosts numerous national annual sporting events and has several large amusement parks. Major golf tournaments include the EDS Byron Nelson and the Bank of America Colonial Golf Tournament. Dallas is one of few metropolitan areas with four professional sports teams, including the Dallas Cowboys football team, the Dallas Mavericks basketball team, the Texas Rangers baseball team and the Dallas Stars hockey team. Key attractions include the Dallas Museum of Art, Nasher Sculpture Center, Crow Collection of Asian Art, Dallas Black Dance Theater Center, and Morton H Meyerson Symphony Center, home of the Dallas Symphony Orchestra. In October 2009, with the opening of the AT&T Performing Arts Center, three new cultural facilities were added to the Arts District: Winspear Opera House, Wyly Theater, and Sammons Performance Park. The Dallas area has a number of museums, galleries, theaters, orchestras and dance groups. Sources: City of Dallas, Parks and Recreation Department; City of Dallas, Office of Cultural Affairs. A-5

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65 APPENDIX B SELECTED PROVISIONS OF THE BOND ORDINANCES

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67 SELECTED PROVISIONS OF THE BOND ORDINANCES On February 25, 2015, the City adopted the Ordinances authorizing the Series 2015A Bonds and the Taxable Series 2015B Bonds, which are in substantially the same form as the ordinances authorizing the outstanding Previously Issued Parity Bonds. Selected provisions of the Ordinances are shown below. The excerpts presented herein do not purport to be complete statements of each Ordinance, and reference is made to the Ordinance for further information in all respects. Section 7. DEFINITIONS. That the following terms shall have the meanings set forth below, unless the text hereof specifically indicates otherwise: The term "Additional Bonds" shall mean the additional parity revenue bonds which the City reserves the right to issue in the future, as provided in the Ordinance. The term "Amortization Installment", with respect to any Term Bonds of any Previously Issued Parity Bonds, any of the Bonds designated in either Ordinance as Term Bonds, or any series of Additional Bonds, shall mean the amount of money which is required to be deposited into the Mandatory Redemption Account referred to in Section 10(b) of each Ordinance for retirement of such Term Bonds (whether at maturity or by mandatory redemption and including redemption premium, if any), provided that the total Amortization Installments for such Term Bonds shall be sufficient to provide for retirement of the aggregate principal amount of such Term Bonds. The term "Authorized Denomination" shall mean $5,000 or any integral multiple thereof. The term "Bonds", as used in this summary, shall include the Series 2015A Bonds and the Taxable Series 2015B Bonds. The term "Series 2015A Bonds" shall mean one or more, as the case may be, of the City of Dallas, Texas Waterworks and Sewer System Revenue Refunding Bonds, Series 2015A, authorized to be issued by the Series 2015A Bond Ordinance. The term "Taxable Series 2015B Bonds" shall mean one or more, as the case may be, of the City of Dallas, Texas Waterworks and Sewer System Revenue Refunding Bonds, Taxable Series 2015B, authorized to be issued by the Taxable Series 2015B Bond Ordinance. The term "Business Day" shall mean a day other than a Saturday, Sunday, a legal holiday, or a day on which banking institutions are authorized by law or executive order to close in the City or the city where the Designated Trust Office of the Paying Agent/Registrar is located. The term "Chapter 9" shall mean Chapter 9, Texas Business & Commerce Code, as amended. The term "Chapter 1206" shall mean Chapter 1206, Texas Government Code, as amended. The term "Chapter 1207" shall mean Chapter 1207, Texas Government Code, as amended. The term "Chapter 1208" shall mean Chapter 1208, Texas Government Code, as amended. The terms "City" and "Issuer" shall mean the City of Dallas, Texas. The term "Code" shall mean the Internal Revenue Code of 1986, as amended. The term "Commercial Paper Notes" shall mean the City's Waterworks and Sewer System Commercial Paper Notes, Series D and Series E, authorized to be outstanding from time to time and at any one time in the aggregate principal amount of $600,000,000. The term "DTC" shall mean The Depository Trust Company, New York, New York. The term "DTC Participant" shall mean the securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations on whose behalf DTC was created to hold securities to facilitate the clearance and settlement of securities transactions among DTC Participants. The term "Designated Trust Office" shall mean the designated corporate trust office of the Paying Agent/Registrar. The terms "Gross Revenues of the City's Combined Waterworks and Sewer System" and "Gross Revenues" shall mean all revenues, income, and receipts of every nature derived or received by the City from the operation and ownership of the System, including the interest income from the investment or deposit of money in any Fund created by the Ordinance, or maintained by the City in connection with the System. B-1

68 The term "Interest and Sinking Fund" shall have the meaning as set forth in Section 10(a) of the Ordinance. The term "MAC" shall mean the Municipal Advisory Council of Texas. The term "MSRB" shall mean the Municipal Securities Rulemaking Board. The terms "Net Revenues of the City's Combined Waterworks and Sewer System" and "Net Revenues" shall mean all Gross Revenues after deducting and paying the current expenses of operation and maintenance of the System, as required by Section , Texas Government Code, including all salaries, labor, materials, interest, repairs, and extensions necessary to render efficient service; provided, however, that only such repairs and extensions, as in the judgment of the City Council, reasonably and fairly exercised by the adoption of the appropriate resolution, are necessary to keep the System in operation and render adequate service to the City and the inhabitants thereof, or such as might be necessary to meet some physical accident or condition which would otherwise impair the Previously Issued Parity Bonds, the Bonds or Additional Bonds, shall be deducted in determining "Net Revenues". Payments made by the City for water supply or treatment of sewage which constitute under the law operation and maintenance expense shall be considered herein as expenses incurred in the operation and maintenance of the System. Depreciation and any payments to the City in lieu of ad valorem taxes and any other similar payments shall never be considered as an expense of operation and maintenance. The term "Ordinance", as used in this summary, shall include the Series 2015A Bond Ordinance and the Taxable Series 2015B Bond Ordinance. The term "Series 2015A Bond Ordinance" shall mean the ordinance authorizing the issuance of the Series 2015A Bonds. The term "Taxable Series 2015B Bond Ordinance" shall mean the ordinance authorizing the issuance of the Taxable Series 2015B Bonds. The term "Paying Agent/Registrar" shall mean U.S. Bank National Association, or any successor thereto named in accordance with the Ordinance. The term "Pledged Revenues" shall mean (1) the Net Revenues, plus (2) any additional revenues, income, receipts, or other resources, including, without limitation, any grants, donations, or income received or to be received from the United States Government, or any other public or private source, whether pursuant to an agreement or otherwise, which hereafter may be pledged to the payment of the Previously Issued Parity Bonds, Bonds or Additional Bonds. The term "Previously Issued Parity Bonds" shall mean the Series 2006 Bonds, the Series 2007 Bonds, the Series 2008 Bonds, the Series 2009A Bonds, the Series 2009B Bonds, the Series 2009C Bonds, the Series 2010 Bonds, the Series 2011 Bonds, the Series 2012A Bonds, the Series 2012B Bonds and the Series 2013 Bonds. The term "Registration Books" shall mean the books or records of the registration and transfer of the Bonds. The term "Reserve Fund" shall have the meaning as set forth in Section 11 of the Ordinance. The term "Revenue Fund" shall have the meaning as set forth in Section 9 of the Ordinance. The term "Rule" shall mean SEC Rule 15c2-12, as amended from time to time. The term "SEC" shall mean the United States Securities and Exchange Commission. The term "Series 1981 Bonds" shall mean the City of Dallas, Texas Waterworks and Sewer System Revenue Refunding Bonds, Series 1981, dated April 1, 1981, and authorized by ordinance of the City passed April 1, 1981; the term "Series 2006 Bonds" shall mean the City of Dallas, Texas Waterworks and Sewer System Revenue Refunding and Improvement Bonds, Series 2006, dated April 1, 2006, and authorized by ordinance of the City passed April 12, 2006; the term "Series 2007 Bonds" shall mean the City of Dallas, Texas Waterworks and Sewer System Revenue Refunding Bonds, Series 2007, dated March 15, 2007, and authorized by ordinance of the City passed March 21, 2007; the term "Series 2008 Bonds" shall mean the City of Dallas, Texas Waterworks and Sewer System Revenue Refunding Bonds, Series 2008, dated May 15, 2008, and authorized by ordinance of the City passed May 28, 2008; the term "Series 2009A Bonds" shall mean the City of Dallas, Texas Waterworks and Sewer System Revenue Bonds, Series 2009A, dated February 1, 2009, and authorized by ordinance of the City passed February 11, 2009; the term "Series 2009B Bonds" shall mean the City of Dallas, Texas Waterworks and Sewer System Revenue Bonds, Series 2009B, dated February 1, 2009, and authorized by ordinance of the City passed February 11, 2009; the term "Series 2009C Bonds" shall mean the City of Dallas, Texas Waterworks and Sewer System Revenue Bonds, Series 2009C, dated February 1, 2009, and authorized by ordinance of the City passed February 11, 2009; the term "Series 2010 Bonds" shall mean the City of B-2

69 Dallas, Texas Waterworks and Sewer System Revenue Refunding Bonds, Series 2010, dated June 15, 2010, and authorized by ordinance of the City passed June 9, 2010; the term "Series 2011 Bonds" shall mean the City of Dallas, Texas Waterworks and Sewer System Revenue Refunding Bonds, Series 2011, dated July 26, 2011, and authorized by ordinance of the City passed June 23, 2011; the term "Series 2012A Bonds" shall mean the City of Dallas, Texas Waterworks and Sewer System Revenue Refunding Bonds, Series 2012A, dated September 19, 2012, and authorized by ordinance of the City passed August 8, 2012; the term "Series 2012B Bonds" shall mean the City of Dallas, Texas Waterworks and Sewer System Revenue Refunding Bonds, Taxable Series 2012B, dated September 19, 2012, and authorized by ordinance of the City passed August 8, 2012; and the term "Series 2013 Bonds" shall mean the City of Dallas, Texas Waterworks and Sewer System Revenue Refunding and Improvement Bonds, Series 2013, dated September 17, 2013, and authorized by ordinance of the City passed August 14, The term "System" shall mean and include the City's combined existing waterworks and sewer system, together with all future extensions, improvements, enlargements, and additions thereto, and all replacements thereof; provided that, notwithstanding the foregoing, and to the extent now or hereafter authorized or permitted by law, the term System shall not include any waterworks or sewer facilities which are declared not to be a part of the System and which are acquired or constructed by the City with the proceeds from the issuance of "Special Facilities Bonds", which are hereby defined as being special revenue obligations of the City which are not secured by or payable from the Pledged Revenues as defined herein, but which are secured by and payable solely from special contract revenues or payments received from any other legal entity in connection with such facilities; and such revenues or payments shall not be considered as or constitute Gross Revenues of the System, unless and to the extent otherwise provided in the ordinance or ordinances authorizing the issuance of such "Special Facilities Bonds". The term "Term Bonds" means those Bonds (if any) so designated in each Ordinance, and those Previously Issued Parity Bonds or Additional Bonds so designated in the ordinances authorizing such bonds, which shall be subject to retirement by operation of the Mandatory Redemption Account referred to in Section 10(a) of the Ordinance. The term "Year" shall mean the regular fiscal year used by the City in connection with the operation of the System, which may be any twelve consecutive months period established by the City. Section 8. PLEDGE. (a) That the Previously Issued Parity Bonds, the Bonds and any Additional Bonds, and any interest payable thereon, are and shall be secured by and payable from an irrevocable first lien on and pledge of the Pledged Revenues; and the Pledged Revenues are further pledged irrevocably to the establishment and maintenance of the Interest and Sinking Fund and the Reserve Fund as hereinafter provided. The Previously Issued Parity Bonds, the Bonds and any Additional Bonds are and will be secured by and payable only from the Pledged Revenues, and are not secured by or payable from a mortgage or deed of trust on any real, personal or mixed properties constituting the System. (b) That Chapter 1208 applies to the issuance of the Bonds and the pledge of the Pledged Revenues granted by the City under subsection (a) of this Section, and such pledge is therefore valid, effective, and perfected. If Texas law is amended at any time while the Bonds are outstanding and unpaid such that the pledge of the Pledged Revenues granted by the City is to be subject to the filing requirements of Chapter 9, then in order to preserve to the registered owners of the Bonds the perfection of the security interest in said pledge, the City agrees to take such measures as it determines are reasonable and necessary under Texas law to comply with the applicable provisions of Chapter 9 and enable a filing to perfect the security interest in said pledge to occur. Section 9. REVENUE FUND. That there has been created and established on the books of the City, and accounted for separate and apart from all other funds of the City, a special fund entitled the "City of Dallas, Texas, Waterworks and Sewer System Revenue Fund" (the "Revenue Fund"). All Gross Revenues are and shall be credited to the Revenue Fund immediately upon receipt. All current expenses of operation and maintenance of the System are and shall be paid from such Gross Revenues as a first charge against same. Section 10. INTEREST AND SINKING FUND. (a) That for the sole purpose of paying the principal of and interest on the Previously Issued Parity Bonds, the Bonds and any Additional Bonds, as the same come due, there has been created and established on the books of the City a separate fund entitled the "City of Dallas, Texas, Waterworks and Sewer System Revenue Bonds Interest and Sinking Fund" (the "Interest and Sinking Fund"). Monies in the Interest and Sinking Fund are and shall be maintained at an official depository bank of the City. (b) That within the Interest and Sinking Fund there has been established the Mandatory Redemption Account, into which account shall be credited the Amortization Installments which shall be used for the payment of the principal of Term Bonds as the same shall come due, whether by maturity thereof or by redemption, through the operation of the Mandatory Redemption Account. Section 11. RESERVE FUND. That there has been created and established on the books of the City a separate fund entitled the "City of Dallas, Texas, Waterworks and Sewer System Revenue Bonds Reserve Fund" (the "Reserve Fund"). Monies B-3

70 in the Reserve Fund shall be used solely for the purpose of retiring the last of any Previously Issued Parity Bonds, Bonds or Additional Bonds as they become due or paying principal of and interest on any Previously Issued Parity Bonds, Bonds or Additional Bonds when and to the extent the amounts in the Interest and Sinking Fund are insufficient for such purpose. Monies in the Reserve Fund shall be maintained at an official depository bank of the City. Section 12. DEPOSITS OF PLEDGED REVENUES; INVESTMENTS. (a) That the Pledged Revenues shall be deposited in the Interest and Sinking Fund and the Reserve Fund when and as required by ordinances authorizing Previously Issued Parity Bonds and by each Ordinance. (b) That money in any Fund established by ordinances authorizing Previously Issued Parity Bonds may, at the option of the City, be (A) placed in time deposits or certificates of deposit which are secured by (i) obligations of the type described in (B) hereinbelow, (ii) any obligations of the City, or (iii) any municipal bonds issued by a political subdivision in Texas bearing a rating by Standard & Poor's Corporation of "BBB" or Moody's Investors Service of "Baa", or better or (B) invested, including investments held in book-entry form, in (i) direct obligations of the United States of America, (ii) obligations guaranteed or insured by the United States of America, which, in the opinion of the Attorney General of the United States, are backed by its full faith and credit or represent its general obligations, or, (iii) to the extent permitted by law, evidences of indebtedness issued, insured or guaranteed by such governmental agencies as the Federal Land Banks, Federal Intermediate Credit Banks, Banks for Cooperatives, Federal Home Loan Banks, Government National Mortgage Association, United States Postal Service, Farmers Home Association, and the Federal Home Loan Mortgage Association; provided that all such deposits and investments shall have a par value (or market value when less than par) exclusive of accrued interest at all times at least equal to the amount of money credited to such Funds, and shall be made in such manner that the money required to be expended from any Fund will be available at the proper time or times. Money in the Reserve Fund shall not be invested in securities maturing later than the final maturity of the Previously Issued Parity Bonds, the Bonds, and Additional Bonds. Such investments shall be valued in terms of current market value as of the last day of each Year, except that direct obligations of the United States (State and Local Government Series) in book-entry form shall be continuously valued at their par or face principal amount. Such investments shall be sold promptly when necessary to prevent any default in connection with the Previously Issued Parity Bonds, the Bonds or Additional Bonds. Section 13. FUNDS SECURED. That money in all Funds created by each Ordinance, to the extent not invested, shall be secured in the manner prescribed by law for securing funds of the City. Section 14. DEBT SERVICE REQUIREMENTS. (a) That promptly after the delivery of the Bonds the City shall cause to be deposited to the credit of the Interest and Sinking Fund any accrued interest received from the sale and delivery of the Bonds, and any such deposit shall be used to pay part of the interest next coming due on the Bonds. (b) That in addition to all amounts heretofore required to be transferred from the Pledged Revenues and deposited to the credit of the Interest and Sinking Fund by the ordinances authorizing the issuance of the Previously Issued Parity Bonds, the City shall transfer from the Pledged Revenues and deposit to the credit of the Interest and Sinking Fund the amounts, at the times, as follows: (1) such amounts, deposited in approximately equal monthly installments on or before the 25th day of each month hereafter, commencing with the month during which the Bonds are delivered, or the month thereafter if delivery is made after the 25th day thereof, as will be sufficient, together with other amounts, if any, then on hand in the Interest and Sinking Fund and available for such purpose, to pay the interest scheduled to accrue and come due on the Bonds on the next succeeding interest payment date; and (2) such amounts, deposited in approximately equal monthly installments on or before the 25th day of each month hereafter, commencing with the month during which the Bonds are delivered, or the month thereafter if delivery is made after the 25th day thereof, as will be sufficient, together with other amounts, if any, then on hand in the Interest and Sinking Fund and available for such purpose, to pay the principal scheduled to mature and come due on the Bonds on the next succeeding principal payment date. Section 15. RESERVE REQUIREMENTS. That the Reserve Fund shall be maintained in an amount equal to the average annual principal and interest requirements (including Amortization Installments) of the Previously Issued Parity Bonds, the Bonds and Additional Bonds (the "Required Amount"). When and so long as the money and investments in the Reserve Fund are not less than the Required Amount, no deposits need be made to the credit of the Reserve Fund. When and if the Reserve Fund contains less than the Required Amount due to the issuance of the Bonds or Additional Bonds, beginning on the 25th day of the month following the delivery of the Bonds or Additional Bonds to the purchasers thereof, and continuing for sixty months, the City shall transfer from the Pledged Revenues and deposit to the credit of the Reserve Fund an amount equal to 1/60th of the difference determined as of such delivery date between the amount in the Reserve Fund and the Required Amount. When and if the Reserve Fund at any time contains less than the Required Amount due to any cause or condition other than the issuance of Additional Bonds, then, subject and subordinate to making the required deposits to the credit of the Interest and Sinking Fund, B-4

71 such deficiency shall be made up as soon as possible from the next available Pledged Revenues, or from any other sources available for such purpose. The City may, at its option, withdraw and use for any lawful purpose not inconsistent with the City's Charter, all surplus in the Reserve Fund over the Required Amount. Section 16. DEFICIENCIES; EXCESS PLEDGED REVENUES. (a) That if on any occasion there shall not be sufficient Pledged Revenues to make the required deposits into the Interest and Sinking Fund and the Reserve Fund, then such deficiency shall be made up as soon as possible from the next available Pledged Revenues, or from any other sources available for such purpose. (b) That, subject to making the required deposits to the credit of the Interest and Sinking Fund and the Reserve Fund when and as required by each Ordinance, or any ordinance authorizing the issuance of Previously Issued Parity Bonds or Additional Bonds, the excess Pledged Revenues may be used by the City for any lawful purpose not inconsistent with the City's Charter. Section 17. PAYMENT OF THE BONDS AND ADDITIONAL BONDS. That on or before October 1, 2015, and semiannually on or before each April 1 and October 1 thereafter while any of the Previously Issued Parity Bonds, the Bonds or Additional Bonds are outstanding and unpaid, the City shall make available to the paying agents therefor (including the Paying Agent/Registrar), out of the Interest and Sinking Fund and the Reserve Fund (if necessary), money sufficient to pay such interest on and such principal of the Previously Issued Parity Bonds, the Bonds and Additional Bonds as shall become due on such dates, respectively, at maturity or by redemption prior to maturity. The aforesaid paying agents (including the Paying Agent/Registrar) shall destroy all paid Previously Issued Parity Bonds, Bonds and Additional Bonds, and furnish the City with an appropriate certificate of cancellation or destruction. Section 18. FINAL DEPOSITS; GOVERNMENTAL OBLIGATIONS. (a) That any Previously Issued Parity Bond, Bond or Additional Bond shall be deemed to be paid, retired and no longer outstanding within the meaning of this Ordinance when payment of the principal of, redemption premium, if any, on such bond, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, upon redemption, or otherwise) either (i) shall have been made or caused to be made in accordance with the terms thereof (including the giving of any required notice of redemption), or (ii) shall have been provided for by irrevocably depositing with, or making available to, a paying agent (or escrow agent) therefor, in trust and irrevocably set aside exclusively for such payment, (1) money sufficient to make such payment or (2) Government Obligations, as hereinafter defined in this Section, certified by an independent public accounting firm of national reputation to mature as to principal and interest in such amounts and at such times as will insure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation, and expenses of such paying agent pertaining to the bonds with respect to which such deposit is made shall have been paid or the payment thereof provided for to the satisfaction of such paying agent. At such time as a Previously Issued Parity Bond, Bond or Additional Bond shall be deemed to be paid hereunder, as aforesaid, it shall no longer be secured by or entitled to the benefit of the Ordinance or such other ordinance securing such bond or a lien on and pledge of the Pledged Revenues, and shall be entitled to payment solely from such money or Government Obligations. (b) That any moneys so deposited with a paying agent may, at the direction of the City, also be invested in Government Obligations, maturing in the amounts and times as hereinbefore set forth, and all income from all Government Obligations in the hands of the paying agent pursuant to this Section which is not required for the payment of the Previously Issued Parity Bonds, Bonds and Additional Bonds, the redemption premium, if any, and interest thereon, with respect to which such money has been so deposited, shall be remitted to the City. (c) That the City covenants that no deposit will be made or accepted under clause (a)(ii) of this Section and no use will be made of any such deposit which would cause the Previously Issued Parity Bonds, Bonds or any Additional Bonds to be treated as "arbitrage bonds" within the meaning of section 148 of the Code. (d) That for the purpose of this Section, the term "Government Obligations" shall mean direct obligations of the United States of America, including obligations the principal of and interest on which are unconditionally guaranteed by the United States of America. (e) That notwithstanding any other provisions of each Ordinance, all money or Government Obligations set aside and held in trust pursuant to the provisions of this Section for the payment of Previously Issued Parity Bonds, Bonds and Additional Bonds, the redemption premium, if any, and interest thereon, shall be applied to and used for the payment of such Previously Issued Parity Bonds, Bonds and Additional Bonds, the redemption premium, if any, and interest thereon. (f) That in accordance with the provisions of Section , Texas Government Code, the City may call for redemption, at a date earlier than their scheduled maturities, those Bonds which have been defeased to their maturity date. Notwithstanding any other provision of each Ordinance to the contrary, it is hereby provided that any determination not to redeem Bonds defeased under the terms of each Ordinance that is made in conjunction with the payment arrangements specified B-5

72 in clauses (i) or (ii) of subsection (a) above shall not be irrevocable, provided that: (1) in the proceedings providing for such payment arrangements, the City expressly reserves the right to call Bonds so defeased for redemption; (2) the City gives notice of the reservation of that right to the owners of the Bonds so defeased immediately following the making of the payment arrangements; and (3) the City directs that notice of the reservation be included in any redemption notices that it authorizes. Section 19. ADDITIONAL BONDS. (a) That the City shall have the right and power at any time and from time to time to authorize, issue and deliver additional parity revenue bonds (herein called "Additional Bonds") in one or more series or issues, in accordance with law, in any amounts, for purposes of extending, improving or repairing the System or for the purpose of refunding of any Previously Issued Parity Bonds, Bonds, Additional Bonds or other obligations of the City incurred in connection with the ownership or operation of the System. Such Additional Bonds, if and when authorized, issued and delivered in accordance with this Ordinance, shall be secured by and made payable equally and ratably on a parity with the Previously Issued Parity Bonds, the Bonds, and all other outstanding Additional Bonds, from an irrevocable first lien on and pledge of the Pledged Revenues. (b) That the Interest and Sinking Fund and the Reserve Fund established by the ordinance authorizing the Series 1981 Bonds shall secure and be used to pay all Additional Bonds as well as the Previously Issued Parity Bonds and the Bonds. However, each ordinance under which Additional Bonds are issued shall provide and require that, in addition to the amounts required to be deposited to the credit of the Interest and Sinking Fund by the provisions of this Ordinance and the provisions of any other ordinance or ordinances authorizing Additional Bonds, the City shall deposit to the credit of the Interest and Sinking Fund at least such amounts as are required for the payment of all principal of and interest on said Additional Bonds then being issued, as the same come due; and that the aggregate amount to be accumulated and maintained in the Reserve Fund shall be increased (if and to the extent necessary) to an amount not less than the average annual principal and interest requirements (including Amortization Installments) of all Previously Issued Parity Bonds, Bonds and Additional Bonds which will be outstanding after the issuance and delivery of the then proposed Additional Bonds; and that the required additional amount shall be so accumulated by the deposit in the Reserve Fund of all or any part of said required additional amount in cash immediately after the delivery of the then proposed Additional Bonds, or, at the option of the City, by the deposit of said required additional amount (or any balance of said required additional amount not deposited in cash as permitted above) in monthly installments, made on or before the 25th day of each month following the delivery of the then proposed Additional Bonds, of not less than 1/60th of said required additional amount (or 1/60th of the balance of said required additional amount not deposited in cash as permitted above). (c) That all calculations of average annual principal and interest requirements (including Amortization Installments) made pursuant to this Section shall be made as of and from the date of the Additional Bonds then proposed to be issued. (d) That the principal of all Additional Bonds must be scheduled to be paid or mature on April 1 or October 1 (or both) of the years in which such principal is scheduled to be paid or mature; and all interest thereon must be payable on April 1 and October 1. Section 20. FURTHER REQUIREMENTS FOR ADDITIONAL BONDS. That Additional Bonds shall be issued only in accordance with the Ordinance, but notwithstanding any provisions of this Ordinance to the contrary, no installment, Series or issue of Additional Bonds shall be issued or delivered unless: (a) The Mayor and the City Secretary of the City sign a written certificate to the effect that the City is not in default as to any covenant, condition or obligation in connection with all outstanding Previously Issued Parity Bonds, the Bonds and Additional Bonds, and the ordinances authorizing same, and that the Interest and Sinking Fund and the Reserve Fund each contains the amount then required to be therein. (b) An independent certified public accountant, or independent firm of certified public accountants, signs a written certificate to the effect that, during either the next preceding Year, or any twelve consecutive calendar month period ending not more than ninety days prior to the date of the then proposed Additional Bonds, the Net Revenues were, in his or its opinion, at least equal to 1.25 times the average annual principal and interest requirements (computed on a fiscal year basis) including Amortization Installments, of all Previously Issued Parity Bonds, the Bonds and Additional Bonds to be outstanding after the issuance of the then proposed Additional Bonds. Section 21. GENERAL COVENANTS. That the City further covenants and agrees that in accordance with and to the extent required or permitted by law: (a) Performance. It will faithfully perform at all times any and all covenants, undertakings, stipulations, and provisions contained in each Ordinance, and each ordinance authorizing the issuance of Previously Issued Parity Bonds and Additional Bonds, and in each and every Previously Issued Parity Bond, Bond and Additional Bond; it will promptly pay or cause to be paid the principal of and interest on every Previously Issued Parity Bond, Bond and Additional Bond, on the dates B-6

73 and in the places and manner prescribed in such ordinances and Previously Issued Parity Bonds, Bonds or Additional Bonds; and it will, at the times and in the manner prescribed, deposit or cause to be deposited the amounts required to be deposited into the Interest and Sinking Fund and the Reserve Fund; and any holder of the Previously Issued Parity Bonds, Bonds or Additional Bonds may require the City, its officials and employees to carry out, respect or enforce the covenants and obligations of each Ordinance, or any ordinance authorizing the issuance of Additional Bonds, by all legal and equitable means, including specifically, but without limitation, the use and filing of mandamus proceedings, in any court of competent jurisdiction, against the City, its officials and employees. (b) City's Legal Authority. It is a duly created and existing home rule city of the State of Texas, and is duly authorized under the laws of the State of Texas to create and issue the Bonds; that all action on its part for the creation and issuance of the Bonds has been duly and effectively taken; and that the Bonds in the hands of the holders and owners thereof are and will be valid and enforceable special obligations of the City in accordance with their terms. (c) Title. It has or will obtain lawful title to the lands, buildings, structures and facilities constituting the System, that it warrants that it will defend the title to all the aforesaid lands, buildings, structures and facilities, and every part thereof, for the benefit of the holders and owners of the Previously Issued Parity Bonds, Bonds and Additional Bonds, against the claims and demands of all persons whomsoever, that it is lawfully qualified to pledge the Pledged Revenues to the payment of the Previously Issued Parity Bonds, Bonds and Additional Bonds in the manner prescribed herein, and has lawfully exercised such rights. (d) Liens. It will from time to time and before the same become delinquent pay and discharge all taxes, assessments and governmental charges, if any, which shall be lawfully imposed upon it, or the System; it will pay all lawful claims for rents, royalties, labor, materials, and supplies which if unpaid might by law become a lien or charge thereon, the lien of which would be prior to or interfere with the liens hereof, so that the priority of the liens granted hereunder shall be fully preserved in the manner provided herein; and it will not create or suffer to be created any mechanic's, laborer's, materialman's or other lien or charge which might or could be prior to the liens hereof, or do or suffer any matter or thing whereby the liens hereof might or could be impaired; provided, however, that no such tax, assessment or charge, and that no such claims which might be used as the basis of a mechanic's, laborer's, materialman's or other lien or charge, shall be required to be paid so long as the validity of the same shall be contested in good faith by the City. (e) Operation of System; No Free Service. It will, while the Previously Issued Parity Bonds, Bonds or any Additional Bonds are outstanding and unpaid, continuously and efficiently operate the System, and shall maintain the System in good condition, repair and working order, all at reasonable cost. No free service of the System shall be allowed, and should the City or any of its agencies or instrumentalities make use of the services and facilities of the System, payment of the reasonable value shall be made by the City out of funds from sources other than the revenues of the System, unless made from surplus or excess Pledged Revenues as permitted in Section 16(b) of each Ordinance. (f) Further Encumbrance. It, while the Previously Issued Parity Bonds, Bonds or any Additional Bonds are outstanding and unpaid, will not additionally encumber the Pledged Revenues in any manner, except as permitted in this Ordinance in connection with Additional Bonds, unless said encumbrance is made junior and subordinate in all respects to the liens, pledges, covenants and agreements of this Ordinance; but the right of the City to issue revenue bonds payable from a subordinate lien on the Pledged Revenues is specifically recognized and retained. (g) Sale or Disposal of Property. It, while the Previously Issued Parity Bonds, the Bonds or any Additional Bonds are outstanding and unpaid, will not sell, convey, mortgage, encumber, lease or in any manner transfer title to, or otherwise dispose of the System, or any significant or substantial part thereof; provided that whenever the City deems it necessary to dispose of any property, machinery, fixtures or equipment, it may sell or otherwise dispose of such property, machinery, fixtures or equipment when it has made arrangements to replace the same or provide substitutes therefor, unless it is determined that no such replacement or substitute is necessary. Proceeds from any sale hereunder not used to replace or provide for substitution of such property sold, shall be used for improvements to the System or to purchase or redeem Previously Issued Parity Bonds, Bonds and Additional Bonds. (h) Insurance. (1) It shall cause to be insured such parts of the System as would usually be insured by corporations operating like properties, with a responsible insurance company or companies, against risks, accidents or casualties against which, and to the extent, insurance is usually carried by corporations operating like properties, including, to the extent reasonably obtainable, fire and extended coverage insurance, insurance against damage by floods, and use and occupancy insurance. Public liability and property damage insurance shall also be carried unless the City Attorney of the City gives a written opinion to the effect that the City is not liable for claims which would be protected by such insurance. At any time while any contractor engaged in construction work shall be fully responsible therefor, the City shall not be required to carry insurance on the work being constructed if the contractor is required to carry appropriate insurance. All such policies shall be open to the inspection of the bondholders and their representatives at all reasonable times. Upon the happening of any loss or damage covered by insurance from one or more of said causes, the City shall make due proof of loss and shall do all things necessary or desirable to cause the insuring companies to make payment in full directly to the City. The proceeds of insurance covering such B-7

74 property, together with any other funds necessary and available for such purpose, shall be used forthwith by the City for repairing the property damaged or replacing the property destroyed; provided, however, that if said insurance proceeds and other funds are insufficient for such purpose, then said insurance proceeds pertaining to the System shall be used promptly as follows: (i) for the redemption prior to maturity of the Previously Issued Parity Bonds, the Bonds and Additional Bonds, ratably in the proportion that the outstanding principal of each series of Previously Issued Parity Bonds, Bonds or Additional Bonds bears to the total outstanding principal of all Previously Issued Parity Bonds, Bonds and Additional Bonds, provided that, if on any such occasion the principal of any such series is not subject to redemption, it shall not be regarded as outstanding in making the foregoing computation; or (ii) if none of the outstanding Previously Issued Parity Bonds, Bonds or Additional Bonds is subject to redemption, then for the purchase on the open market and retirement of said Previously Issued Parity Bonds, Bonds and Additional Bonds in the same proportion as prescribed in the foregoing clause (i), to the extent practicable; provided that the purchase price for any Previously Issued Parity Bond, Bond or Additional Bond shall not exceed the redemption price of such Previously Issued Parity Bond, Bond or Additional Bond on the first date upon which it becomes subject to redemption; or (iii) to the extent that the foregoing clauses (i) and (ii) cannot be complied with at the time, the insurance proceeds, or the remainder thereof, shall be deposited in a special and separate trust fund, at an official depository of the City, to be designated the Insurance Account. The Insurance Account shall be held until such time as the foregoing clauses (i) and/or (ii) can be complied with, or until other funds become available which, together with the Insurance Account, will be sufficient to make the repairs or replacements originally required, whichever of said events occurs first. (2) The foregoing provisions of (1) above notwithstanding, the City shall have authority to enter into coinsurance or similar plans where risk of loss is shared in whole or in part by the City. (3) The annual audit hereinafter required shall contain a section commenting on whether or not the City has complied with the requirements of this Section with respect to the maintenance of insurance, and listing all policies carried, and whether or not all insurance premiums upon the insurance policies to which reference is hereinbefore made have been paid. (i) Rate Covenant. The City Council of the City will fix, establish, maintain and collect such rates, charges and fees for the use and availability of the System at all times as are necessary to produce Gross Revenues sufficient, (1) to pay all current operation and maintenance expenses of the System, (2) to produce Net Revenues for each Year at least equal to 1.25 times the principal and interest requirements (including Amortization Installments) of all then outstanding Previously Issued Parity Bonds, Bonds and Additional Bonds for the Year during which such requirements are scheduled to be the greatest, and (3) to pay all other obligations of the System. (j) Records. It will keep proper books of record and account in which full, true and correct entries will be made of all dealings, activities and transactions relating to the System, the Pledged Revenues and the Funds created pursuant to this Ordinance, and all books, documents and vouchers relating thereto shall at all reasonable times be made available for inspection upon request of any bondholders. (k) Audits. After the close of each Year while any of the Previously Issued Parity Bonds, Bonds or any Additional Bonds are outstanding, an audit will be made of the books and accounts relating to the System and the Pledged Revenues by an independent certified public accountant or an independent firm of certified public accountants. As soon as practicable after the close of each such Year, and when said audit has been completed and made available to the City, a copy of such audit for the preceding Year shall be mailed to the MAC and to any holder of 5% or more in aggregate principal amount of then outstanding Previously Issued Parity Bonds, Bonds and Additional Bonds who shall so request in writing. Such annual audit reports shall be open to the inspection of the bondholders and their agents and representatives at all reasonable times. (l) Governmental Agencies. It will comply with all of the terms and conditions of any and all franchises, permits and authorizations applicable to or necessary with respect to the System, and which have been obtained from any governmental agency; and the City has or will obtain and keep in full force and effect all franchises, permits, authorization and other requirements applicable to or necessary with respect to the acquisition, construction, equipment, operation and maintenance of the System. (m) No Competition. It will not grant any franchise or permit for the acquisition, construction or operation of any competing facilities which might be used as a substitute for the System's facilities, and, to the extent that it legally may, the City will prohibit any such competing facilities. B-8

75 Section 22. AMENDMENT OF ORDINANCE. (a) That the holders of the Previously Issued Parity Bonds, Bonds and Additional Bonds aggregating in principal amount 51% of the aggregate principal amount of then outstanding Previously Issued Parity Bonds, Bonds and Additional Bonds shall have the right from time to time to approve any amendment to each Ordinance which may be deemed necessary or desirable by the City; provided, however, that without the consent of the holders of all of the Previously Issued Parity Bonds, Bonds and Additional Bonds at the time outstanding, nothing herein contained shall permit or be construed to permit the amendment of the terms and conditions in each Ordinance or in the Previously Issued Parity Bonds, Bonds or Additional Bonds so as to: (1) Make any change in the maturity of the outstanding Previously Issued Parity Bonds, Bonds or Additional Bonds; (2) Reduce the rate of interest borne by any of the outstanding Previously Issued Parity Bonds, Bonds or Additional Bonds; (3) Reduce the amount of the principal payable on the outstanding Previously Issued Parity Bonds, Bonds or Additional Bonds; (4) Modify the terms of payment of principal of or interest on the outstanding Previously Issued Parity Bonds, Bonds or Additional Bonds or impose any conditions with respect to such payment; (5) Affect the rights of the holders of less than all of the Previously Issued Parity Bonds, Bonds and Additional Bonds then outstanding; or (6) Change the minimum percentage of the principal amount of Previously Issued Parity Bonds, Bonds and Additional Bonds necessary for consent to such amendment. (b) That if at any time the City shall desire to amend either Ordinance, the City shall cause notice of the proposed amendment to be published in a financial newspaper or journal published in The City of New York, New York, once during each calendar week for at least two successive calendar weeks. Such notice shall briefly set forth the nature of the proposed amendment and shall state that a copy thereof is on file at the principal office of the Paying Agent/Registrar for inspection by all holders of Previously Issued Parity Bonds, Bonds and Additional Bonds. Such publication is not required, however, if notice in writing is given to each holder of Previously Issued Parity Bonds, Bonds and Additional Bonds. (c) That whenever at any time not less than thirty days, and within one year, from the date of the first publication of said notice or other service of written notice the City shall receive an instrument or instruments executed by the holders of at least 51% in aggregate principal amount of all Previously Issued Parity Bonds, Bonds and Additional Bonds then outstanding, which instrument or instruments shall refer to the proposed amendment described in said notice and which specifically consent to and approve such amendment in substantially the form of the copy thereof on file with the Paying Agent/Registrar, the City Council may pass the amendatory ordinance in substantially the same form. (d) That upon the passage of any amendatory ordinance pursuant to the provisions of this Section, the applicable Ordinance shall be deemed to be amended in accordance with such amendatory ordinance, and the respective rights, duties and obligations under the applicable Ordinance of the City and all the holders of then outstanding Previously Issued Parity Bonds, Bonds and Additional Bonds shall thereafter be determined, exercised and enforced hereunder, subject in all respects to such amendments. (e) That any consent given by the holder of a Previously Issued Parity Bond, Bond or Additional Bond pursuant to the provisions of this Section shall be irrevocable for a period of six months from the date of the first publication of the notice or other service of written notice provided for in this Section, and shall be conclusive and binding upon all future holders of the same Previously Issued Parity Bond, Bond or Additional Bond during such period. Such consent may be revoked at any time after six months from the date of the first publication of such notice or other service of written notice by the holder who gave such consent, or by a successor in title, by filing notice thereof with the paying agent/registrar therefor and the City, but such revocation shall not be effective if the holders, identified in accordance with subsection (f) of this Section, of 51% in aggregate principal amount of the then outstanding Previously Issued Parity Bonds, Bonds and Additional Bonds have, prior to the attempted revocation, consented to and approve the amendment. (f) That for the purpose of this Section, the fact of the holding of Previously Issued Parity Bonds, Bonds, or Additional Bonds issued in registered form without coupons and the amounts and numbers of such Previously Issued Parity Bonds, Bonds or Additional Bonds and the date of their holding same shall be proved by the bond registration books of the paying agent/registrar therefor. For purposes of this Section, the holder of a Previously Issued Parity Bond, Bond or Additional Bond in such registered form shall be the owner thereof as shown on such registration books. The City may conclusively assume that such ownership continues until written notice to the contrary is served upon the City. B-9

76 (g) The foregoing provisions of this Section notwithstanding, the City by action of the City Council may amend this Ordinance for any one or more of the following purposes: (1) To add to the covenants and agreements of the City in either Ordinance contained, other covenants and agreements thereafter to be observed, grant additional rights or remedies to bondholders or to surrender, restrict or limitanyrightorpowerhereinreservedtoorconferreduponthecity; (2) To make such provisions for the purpose of curing any ambiguity, or curing, correcting or supplementing any defective provision contained in either Ordinance, or in regard to clarifying matters or questions arising under this Ordinance, including, without limitation, those matters described in clause (vi) of each Ordinance as described under CONTINUING DISCLOSURE UNDERTAKING Limitations, Disclaimers, and Amendments, as are necessary or desirable and not contrary to or inconsistent with the applicable Ordinance and which shall not adversely affect the interests of the holders of the Previously Issued Parity Bonds, Bonds or Additional Bonds; (3) To modify any of the provisions of either Ordinance in any other respect whatever, provided that (i) such modification shall be, and be expressed to be, effective only after all Previously Issued Parity Bonds outstanding at the date of the adoption of such modification shall cease to be outstanding, and (ii) such modification shall be specifically referred to in the text of all Additional Bonds issued after the date of the adoption of such modification. Section 26. CONTINUING DISCLOSURE UNDERTAKING. (a) Annual Reports. (i) That the City shall provide annually to the MSRB, within six months after the end of each Year ending in or after 2014, financial information and operating data with respect to the City of the general type included in the final official statement for the Bonds authorized by the applicable Ordinance, being the information described in Exhibit B thereto (as such information may be amended or supplemented by the City Manager or the Chief Financial Officer of the City to conform Exhibit B to the final official statement prepared in connection with the sale of the Bonds). Any financial statements so to be provided shall be (1) prepared in accordance with the accounting principles described in Exhibit B thereto, or such other accounting principles as the City may be required to employ from time to time pursuant to state law or regulation, and (2) audited, if the City commissions an audit of such statements and the audit is completed within the period during which they must be provided. If the audit of such financial statements is not complete within such period, then the City shall provide unaudited financial statements by the required time and will provide audited financial statements for the applicable Year to the MSRB, when and if the audit report on such statements become available. Such information shall be transmitted electronically to the MSRB, in such format as prescribed by the MSRB. (ii) If the Year is changed by the City, the City will notify the MSRB of such change (and of the date of the new Year end) prior to the next date by which the City otherwise would be required to provide financial information and operating data pursuant to this Section. The financial information and operating data to be provided pursuant to this Section may be set forth in full in one or more documents or may be included by specific reference to any document (including an official statement or other offering document, if it is available from the MSRB) that theretofore has been provided to the MSRB or filed with the SEC. (b) Disclosure Event Notices. That the City shall notify the MSRB of any of the following events with respect to the Bonds, in a timely manner not in excess of ten Business Days after the occurrence of the event: 1. Principal and interest payment delinquencies; 2. Non-payment related defaults, if material; 3. Unscheduled draws on debt service reserves reflecting financial difficulties; 4. Unscheduled draws on credit enhancements reflecting financial difficulties; 5. Substitution of credit or liquidity providers, or their failure to perform; 6. Adverse tax opinions, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other events affecting the tax status of the Bonds; 7. Modifications to rights of holders of the Bonds, if material; 8. Bond calls, if material, and tender offers; 9. Defeasances; 10. Release, substitution, or sale of property securing repayment of the Bonds, if material; 11. Rating changes; 12. Bankruptcy, insolvency, receivership or other similar event of the City; 13. The consummation of a merger, consolidation, or acquisition involving the City or the sale of all or substantially all of the assets of the City, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and 14. Appointment of a successor Paying Agent/Registrar or change in the name of the Paying Agent/Registrar, if material. B-10

77 As used in clause 12 above, the phrase "bankruptcy, insolvency, receivership or similar event" means the appointment of a receiver, fiscal agent or similar officer for the City in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets of the City, or if jurisdiction has been assumed by leaving the City Council and officials or officers of the City in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the City. The City shall notify the MSRB, in a timely manner, of any failure by the City to provide financial information or operating data in accordance with subsection (a) of this Section by the time required by such subsection. (c) Limitations, Disclaimers, and Amendments. (i) That the City shall be obligated to observe and perform the covenants specified in this Section for so long as, but only for so long as, the City remains an "obligated person" with respect to the Bonds within the meaning of the Rule, except that the City in any event will give notice of any deposit made in accordance with the applicable Ordinance or applicable law that causes Bonds no longer to be outstanding. (ii) The provisions of this Section are for the sole benefit of the holders and beneficial owners of the Bonds, and nothing in this Section, express or implied, shall give any benefit or any legal or equitable right, remedy, or claim hereunder to any other person. The City undertakes to provide only the financial information, operating data, financial statements, and notices which it has expressly agreed to provide pursuant to this Section and does not hereby undertake to provide any other information that may be relevant or material to a complete presentation of the City's financial results, condition, or prospects or hereby undertake to update any information provided in accordance with this Section or otherwise, except as expressly provided herein. The City does not make any representation or warranty concerning such information or its usefulness to a decision to invest in or sell Bonds at any future date. (iii) UNDER NO CIRCUMSTANCES SHALL THE CITY BE LIABLE TO THE HOLDER OR BENEFICIAL OWNER OF ANY BOND OR ANY OTHER PERSON, IN CONTRACT OR TORT, FOR DAMAGES RESULTING IN WHOLE OR IN PART FROM ANY BREACH BY THE CITY, WHETHER NEGLIGENT OR WITHOUT FAULT ON ITS PART, OF ANY COVENANT SPECIFIED IN THIS SECTION, BUT EVERY RIGHT AND REMEDY OF ANY SUCH PERSON, IN CONTRACT OR TORT, FOR OR ON ACCOUNT OF ANY SUCH BREACH SHALL BE LIMITED TO AN ACTION FOR MANDAMUS OR SPECIFIC PERFORMANCE. (iv) No default by the City in observing or performing its obligations under this Section shall comprise a breach of or default under either Ordinance for purposes of any other provision of either Ordinance. Nothing in this Section is intended or shall act to disclaim, waive, or otherwise limit the duties of the City under federal and state securities laws. (v) Should the Rule be amended to obligate the City to make filings with or provide notices to entities other than the MSRB, the City agrees to undertake such obligation in accordance with the Rule as amended. (vi) The provisions of this Section may be amended by the City from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the City, but only if (1) the provisions of this Section, as so amended, would have permitted an underwriter to purchase or sell Bonds in the primary offering of the Bonds in compliance with the Rule, taking into account any amendments or interpretations of the Rule since such offering as well as such changed circumstances and (2) either (A) the holders of a majority in aggregate principal amount (or any greater amount required by any other provision of this Ordinance that authorizes such an amendment) of the outstanding Bonds consent to such amendment or (B) a person that is unaffiliated with the City (such as nationally recognized bond counsel) determines that such amendment will not materially impair the interest of the holders and beneficial owners of the Bonds. If the City so amends the provisions of this Section, it shall include with any amended financial information or operating data next provided in accordance with subsection (a) of this Section an explanation, in narrative form, of the reason for the amendment and of the impact of any change in the type of financial information or operating data so provided. The City may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provision of the Rule or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds. Section 28. DEFAULT AND REMEDIES. (a) Events of Default. That each of the following occurrences or events for the purpose of the Ordinance is hereby declared to be an Event of Default: (i) the failure to make payment of the principal of or interest on any of the Bonds when the same becomes due and payable; or (ii) default in the performance or observance of any other covenant, agreement or obligation of the City, the failure to perform which materially, adversely affects the rights of the registered owners of the Bonds, including, but not limited B-11

78 to, their prospect or ability to be repaid in accordance with each Ordinance, and the continuation thereof for a period of 60 days after notice of such default is given by any registered owner to the City. (b) Remedies for Default. (i) Upon the happening of any Event of Default, then and in every case, any registered owner or an authorized representative thereof, including, but not limited to, a trustee or trustees therefor, may proceed against the City, or any official, officer or employee of the City in their official capacity, for the purpose of protecting and enforcing the rights of the registered owners under each Ordinance, by mandamus or other suit, action or special proceeding in equity or at law, in any court of competent jurisdiction, for any relief permitted by law, including the specific performance of any covenant or agreement contained herein, or thereby to enjoin any act or thing that may be unlawful or in violation of any right of the registered owners hereunder or any combination of such remedies. (ii) It is provided that all such proceedings shall be instituted and maintained for the equal benefit of all registered owners of Bonds then outstanding. (c) Remedies Not Exclusive. (i) No remedy herein conferred or reserved is intended to be exclusive of any other available remedy or remedies, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or under the Bonds or now or hereafter existing at law or in equity; provided, however, that notwithstanding any other provision of each Ordinance, the right to accelerate the debt evidenced by the Bonds shall not be available as a remedy under each Ordinance. (ii) The exercise of any remedy herein conferred or reserved shall not be deemed a waiver of any other available remedy. (iii) By accepting the delivery of a Bond authorized under either Ordinance, such registered owner agrees that the certifications required to effectuate any covenants or representations contained in either Ordinance do not and shall never constitute or give rise to a personal or pecuniary liability or charge against the officers, employees or members of the City or the City Council. (iv) None of the members of the City Council, nor any other official or officer, agent, or employee of the City, shall be charged personally by the registered owners with any liability, or be held personally liable to the registered owners under any term or provision of either Ordinance, or because of any Event of Default or alleged Event of Default under either Ordinance. Section 33. CONSENT TO CERTAIN AMENDMENTS GIVEN THROUGH OWNERSHIP OF BONDS. By acceptance of the Bonds, each Owner of a Bond: (i) irrevocably and specifically consents to and approves the amendments described in (1) and (2) below; (ii) irrevocably appoints the City Manager as its true and lawful attorneyin-fact for the limited purpose of executing the written instrument required by Section 22(c) of the Ordinances to evidence the Owner s specific consent to and approval of the amendments described in (1) and (2) below; and (iii) confirms all actions taken by the City Manager as attorney-in-fact for the Owner, it being specifically provided that the City Manager need not consult with, or provide notice to, an Owner in connection with the actions taken by the City Manager under this Section. The power of attorney granted to the City Manager shall be limited to effecting the below amendments and is irrevocable for so long as any Bond remains Outstanding. The amendments are: (1) Amend Section 12(b) of the Ordinances to read: "(b) That money in any Fund established by ordinances authorizing Previously Issued Parity Bonds may, at the option of the City, be invested in Authorized Investments; provided, however, that all such deposits and investments shall have a par value (or market value when less than par) exclusive of accrued interest at all times at least equal to the amount of money credited to such Funds, and shall be made in such manner that the money required to be expended from any Fund will be available at the proper time or times. Money in the Reserve Fund shall not be invested in securities maturing later than the final maturity of the Previously Issued Parity Bonds, the Bonds, and Additional Bonds. Such investments shall be valued in terms of current market value as of the last day of each Year, except that direct obligations of the United States (State and Local Government Series) in book-entry form shall be continuously valued at their par or face principal amount. Such investments shall be sold promptly when necessary to prevent any default in connection with the Previously Issued Parity Bonds, the Bonds or Additional Bonds. As used in this Section, the term "Authorized Investments" shall mean those investments in which the City is now or hereafter authorized by B-12

79 law, including, but not limited to, Chapter 2256, Texas Government Code, and consistent with the City s investment policy adopted and approved from time to time by the City Council pursuant to the provisions of Chapter 2256, Texas Government Code,, to purchase, sell and invest its funds and funds under its control. (2) Amend Section 18 of the Ordinances to read: "(a) That any Previously Issued Parity Bond, Bond or Additional Bond shall be deemed to be paid, retired and no longer outstanding within the meaning of the Ordinances when payment of the principal of, redemption premium, if any, on such bond, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, upon redemption, or otherwise) either (i) shall have been made or caused to be made in accordance with the terms thereof (including the giving of any required notice of redemption), or (ii) shall have been provided for by irrevocably depositing with, or making available to, a paying agent (or escrow agent) therefor, in trust and irrevocably set aside exclusively for such payment, (1) money sufficient to make such payment or (2) Defeasance Securities, as hereinafter defined in this Section, certified by an independent public accounting firm of national reputation to mature as to principal and interest in such amounts and at such times as will insure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation, and expenses of such paying agent pertaining to the bonds with respect to which such deposit is made shall have been paid or the payment thereof provided for to the satisfaction of such paying agent. At such time as a Previously Issued Parity Bond, Bond or Additional Bond shall be deemed to be paid hereunder, as aforesaid, it shall no longer be secured by or entitled to the benefit of the Ordinances or such other ordinance securing such bond or a lien on and pledge of the Pledged Revenues, and shall be entitled to payment solely from such money or Defeasance Securities. (b) That any moneys so deposited with a paying agent may, at the direction of the City, also be invested in Defeasance Securities, maturing in the amounts and times as hereinbefore set forth, and all income from all Defeasance Securities in the hands of the paying agent pursuant to this Section which is not required for the payment of the Previously Issued Parity Bonds, Bonds and Additional Bonds, the redemption premium, if any, and interest thereon, with respect to which such money has been so deposited, shall be remitted to the City. (c) That the City covenants that no deposit will be made or accepted under clause (a)(ii) of this Section and no use will be made of any such deposit which would cause the Previously Issued Parity Bonds, Bonds or any Additional Bonds to be treated as "arbitrage bonds" within the meaning of section 148 of the Code. (d) That for the purpose of this Section, the term "Defeasance Securities" shall mean (i) direct obligations of the United States of America, including obligations the principal of and interest on which are unconditionally guaranteed by the United States of America, (ii) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that, on the date the City adopts or approves proceedings authorizing the issuance of refunding bonds or, if such defeasance is not in connection with the issuance of refunding bonds, on the date the City provides for the funding of an escrow to effect the defeasance of the Bonds, are rated as to investment quality by a nationally-recognized investment rating firm not less than "AAA" or its equivalent, (iii) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that, on the date the City adopts or approves proceedings authorizing the issuance of refunding bonds or, if such defeasance is not in connection with the issuance of refunding bonds, on the date the Board provides for the funding of an escrow to effect the defeasance of the Bonds, are rated as to investment quality by a nationally-recognized investment rating firm not less than "AAA" or its equivalent, or (iv) any other then authorized securities or obligations that may be used to defease obligations such as the Bonds under the then applicable laws of the State of Texas. (e) That notwithstanding any other provisions of the Ordinances, all money or Defeasance Securities set aside and held in trust pursuant to the provisions of this Section for the payment of Previously Issued Parity Bonds, Bonds and Additional Bonds, the redemption premium, if any, and interest thereon, shall be applied to and used for the payment of such Previously Issued Parity Bonds, Bonds and Additional Bonds, the redemption premium, if any, and interest thereon. (f) That in accordance with the provisions of Section , Texas Government Code, the City may call for redemption, at a date earlier than their scheduled maturities, those Bonds which have been defeased to their maturity date. Notwithstanding any other provision of the Ordinances to the contrary, it is hereby provided that any determination not to redeem Bonds defeased under the terms of the Ordinances that is made in conjunction with the payment arrangements specified in clauses (i) or (ii) of subsection (a) above shall not be irrevocable, provided that: (1) in the proceedings providing for such payment arrangements, the City expressly reserves the right to call Bonds so defeased for redemption; (2) the City gives notice of the reservation of that right to the owners of the Bonds so defeased immediately following the making of the payment arrangements; and (3) the City directs that notice of the reservation be included in any redemption notices that it authorizes." B-13

80 (3) Amend Section 20(b) of the Ordinances to read: "(b) The Chief Financial Officer of the City signs a written certificate to the effect that, during either the next preceding Year, or any twelve consecutive calendar month period ending not more than ninety days prior to the date of the then proposed Additional Bonds, the Net Revenues were, in her or his opinion, at least equal to 1.25 times the average annual principal and interest requirements (computed on a fiscal year basis) including Amortization Installments, of all Previously Issued Parity Bonds, the Bonds and Additional Bonds to be outstanding after the issuance of the then proposed Additional Bonds." The amendments described in clauses (1) and (3) will become effective once the City determines that the consent of 51% of the aggregate unpaid principal amount of the Previously Issued Parity Bonds, the Bonds and any Additional Bonds then Outstanding is received. The amendment described in clause (2) will become effective once the City determines that the consent of 51% of the aggregate unpaid principal amount of the Previously Issued Parity Bonds, the Bonds and any Additional Bonds then Outstanding is received, and would apply only to the Bonds and the Taxable Series 2015B Bonds, and any Additional Bonds delivered after the date of delivery of the Bonds and the Taxable Series 2015B Bonds. Exhibit B to Ordinance DESCRIPTION OF ANNUAL FINANCIAL INFORMATION Annual Financial Statements and Operating Data The financial information and operating data with respect to the City to be provided annually in accordance with such Section are as specified below (and included in the Appendix or under the headings of the Official Statement referred to): Tables 1 through 9 under the Official Statement Section entitled "THE WATER AND WASTEWATER SYSTEM". Tables 10 through 12 under the Official Statement Section entitled "DEBT INFORMATION". Tables 13 through 17 under the Official Statement Section entitled "FINANCIAL INFORMATION". Appendix C to the Official Statement, entitled "DALLAS WATER UTILITIES FINANCIAL STATEMENTS". Accounting Principles The accounting principles referred to in such Section are described in the notes to the financial statements referred to in Appendix C described above. B-14

81 APPENDIX C DALLAS WATER UTILITIES FINANCIAL STATEMENTS For the Year Ended September 30, 2013 The information contained in this Appendix consists of the City of Dallas, Texas Water Utilities Financial Statements for the Year Ended September 30, 2013, and is not intended to be a complete statement of the financial condition of the Dallas Water Utilities.

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83 Basic Financial Statements and Report of Independent Certified Public Accountants City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) September 30, 2013

84 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) FINANCIAL STATEMENTS For Fiscal Year Ended September 30, 2013 TABLE OF CONTENTS Page Report of Independent Certified Public Accountants 1 Management s Discussion and Analysis (Unaudited) 3 Statement of Net Position 9 Statement of Revenues, Expenses, and Changes in Fund Net Position 11 Statement of Cash Flows 12 Notes to Basic Financial Statements 14

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87 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) September 30, 2013 As management of the Dallas Water Utilities ( DWU ), an enterprise fund of the City of Dallas, Texas ( the City ), we offer readers of the financial statements this narrative overview and analysis of the financial activities of the DWU for the fiscal year ended September 30, The DWU s management s discussion and analysis is designed to (1) assist the reader in focusing on significant issues, (2) provide an overview of the DWU financial activity, (3) identify changes in the DWU s financial position (its ability to address the next and subsequent year s challenges), and (4) identify issues or concerns. We encourage readers to consider the information presented here in conjunction with the accompanying basic financial statements. All dollar amounts, unless otherwise indicated, are expressed in thousands. FINANCIAL HIGHLIGHTS The assets and deferred outflows of the DWU exceeded its liabilities at the close of the 2013 fiscal year by $2.4 billion and in the 2012 fiscal year by $2.3 billion (net position). Of this amount, $194.9 million in fiscal year 2013 (unrestricted net position) may be used to meet the DWU ongoing obligations to citizens and creditors in accordance with the City s fund designation and fiscal policies. The DWU total net position increased by $108.2 million in fiscal year 2013 and $88.9 million in fiscal year This represents an increase of $19.3 million in the net increase in net position from 2012 to Operating revenues increased $24.1 million in fiscal year This was primarily due to increased sales and rate increases for both water and wastewater. This was offset by a $9.4 million increase in operating expenses due primarily to related to increased salaries, benefits, and other variable costs, partially offset by declines in expenses related to sludge cleaning and data services. The DWU revenue bonds increased $57.6 million (net of premiums and discounts) from 2012 to DWU issued $156.5 million of revenue bonds during the current fiscal year and $366.1 million in revenue bonds in the previous fiscal year. OVERVIEW OF THE FINANCIAL STATEMENTS The DWU basic financial statements are comprised of three components: 1) management s discussion and analysis, 2) financial statements, and 3) notes to the basic financial statements. Financial Statements The financial statements are designed to provide readers with a broad overview of the DWU s finances, in a manner similar to a private-sector business and are made up of the statement of net position, statement of revenues, expenses, and changes in fund net position and statement of cash flows. 3

88 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) September 30, 2013 OVERVIEW OF THE FINANCIAL STATEMENTS - Continued These statements are prepared using the economic resources measurement focus and the accrual basis of accounting. The statement of net position presents information on all of the DWU assets and deferred outflows and liabilities and deferred inflows, with the difference between these reported as net position. The DWU follows the utility method for reporting statement of net position information. Under this method, capital assets appear first, followed by current assets, other noncurrent assets and deferred outflows of resources. Over time, increases or decreases in net position may serve as a useful indicator of whether the financial position of the DWU is improving or deteriorating. Other non-financial factors should also be taken into consideration, such as changes in the DWU customer base and the condition of the DWU infrastructure (i.e., water and wastewater lines, mains, etc.), to assess the overall health or financial condition of the DWU. The statement of revenues, expenses and changes in fund net position presents information showing how the DWU net position changed during the fiscal year. All changes in net position are reported when the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future fiscal periods (e.g., revenues earned but unbilled and earned but unused compensated absences). The statement of cash flows reflects changes to the beginning cash and cash equivalent balance. Cash flows are categorized into operating, non-capital financing, capital and related financing, and investing activities. Notes to the Basic Financial Statements The notes provide additional information that is essential to a full understanding of the data provided in the financial statements. The notes can be found immediately following the financial statements. FINANCIAL ANALYSIS Current assets increased by $11.9 million from $400.5 million to $412.4 million, primarily from an increase in unrestricted cash related to increased rates and sales, and non-current assets increased $163.9 million, primarily as a result of an increase in capital assets. Current liabilities decreased less than 1% from the previous fiscal year. In September 2013, DWU issued Waterworks and Sewer System Revenue Refunding Bonds Series 2013 of $156.5 million with an interest rate range of 2 to 5 percent and a final maturity of October 1, The bonds were issued to refund outstanding commercial paper used by DWU to fund capital construction projects. This was the only debt issued during The increase in refunding bonds payable was partially offset by decreases in pension obligation bonds. Capital assets, net of depreciation, increased $223.6 million, mainly due to new project awards for water and wastewater treatment plant expansion and improvement. Unrestricted net position is a measure of a fund s liquidity. As of September 30, 2013, unrestricted net position was $194.9 million. This represents 75% of the total operating expenses, excluding depreciation expense. 4

89 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) September 30, 2013 FINANCIAL ANALYSIS Continued Table 1 Condensed Statement of Net Position (In thousands) Current and other noncurrent assets $674,070 $721,956 Capital assets, net 4,210,570 3,986,929 Deferred outflows of resources 25,626 28,936 Total assets and deferred outflows of resources 4,910,266 4,737,821 Current liabilities 230, ,423 Long-term debt 2,242,517 2,182,214 Other long-term liabilities 44,445 38,354 Total liabilities 2,517,266 2,452,991 Net position: Net investment in capital assets 2,011,972 1,962,446 Restricted 186, ,998 Unrestricted 194, ,386 Net position $2,393,000 $2,284,830 The largest portion of the DWU net position reflects its investments in capital assets (e.g., land, building, equipment, improvements, construction in progress and infrastructure), less any debt used to acquire those assets that is still outstanding. DWU uses these capital assets to provide service to customers; consequently, these assets are not available for future spending. Although DWU investment in capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources since the capital assets themselves cannot be used to liquidate these liabilities. An additional portion of DWU s net position, 8%, represents resources that are subject to external restrictions such as sinking fund balances which include accrued amounts of principal and interest for debt service purposes and the reserve fund to be used for any future debt service payments in case the sinking fund is not appropriately funded. The balance of unrestricted net position ($194.9 million) may be used to meet ongoing obligations to customers and creditors. Analysis of DWU Operations Net position increased $108.2 million, primarily from increased revenue attributable to the sale of wholesale and retail water and treatment of wastewater in fiscal year Revenues from sale of water accounted for $330 million and revenues from the treatment of wastewater accounted for $221.5 million. Retail water and wastewater rates increased 5.1% and wholesale rates increased 4% in fiscal year

90 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) September 30, 2013 FINANCIAL ANALYSIS Continued Table 2 Changes in Net Position (In thousands) Revenues: Operating revenues $551,498 $527,374 Investment income 1,127 2,509 Total revenues 552, ,883 Expenses: Personnel services 86,839 74,589 Supplies and materials 82,874 81,046 Other operation and maintenance 89, ,460 Depreciation and amortization 105,528 99,619 Interest expense 71,164 73,350 Loss on property disposal Total expenses 436, ,313 Increase in net position before capital contributions and transfers 115, ,570 Capital contributions 11,411 5,510 Transfers in from other city funds 1,560 1,649 Transfers out to other city funds (20,568) (18,859) Change in net position 108,170 88,870 Beginning net position 2,284,830 2,195,960 Ending net position $2,393,000 $2,284,830 The change in net position increased $19.3 million compared to fiscal year 2012 from $88.9 million to $108.2 million. Revenues increased $22.7 million in 2013 over 2012, compared to an increase from 2011 to 2012 of $2.6 million. This was the result of increased sales and rates in fiscal year Capital contributions increased due to increases in amounts spent on construction by outside developers. Personnel services increased $12.3 million due to increases in salaries and benefits and in an increase in expenses related to the DWU net pension asset. Other operation and maintenance expenses decreased due primarily to the completion in 2012 of a large sludge cleaning project at the Elm Fork water treatment facility, as well as decreases in data services expenses from 2012 to In 2012, the City refunded revenue bonds, which resulted in lower average outstanding balances and therefore, lower interest expense in 2013 than in

91 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) September 30, 2013 CAPITAL ASSETS AND DEBT ADMINISTRATION Capital Assets During the current fiscal year, DWU had $4.2 billion invested in a broad range of capital assets, including water and sewer lines, mains, pump stations, buildings and vehicles. This amount represents a net increase (including additions, deductions and depreciation) of $223.6 million, or 6%, increase over the prior fiscal year. The current fiscal year included project awards related to water and wastewater treatment plant expansion and improvement. Some of the major projects attributable to this increase include: $91 million Pipeline Replacement and Pump Station Program; $40 million in East Side Water Treatment Plant Improvements; $44 million in Elm Fork Water Treatment Plant improvements; $42 million in improvements to the Central Wastewater Treatment Plant; $19 million construction of the Southside Wastewater Treatment Plant improvements. During 2012, the City entered into the Water Transmission Facilities Agreement with the TRWD to jointly participate in the design, construction, financing and operation of water transmission facilities capable of delivering additional raw water supply to the Dallas Fort/Worth Metroplex. This will also help to ensure the continued availability of a reliable water supply for their respective customers at the least cost. The TRWD issued bonds to construct the project, $131.9 million of which are being used to fund the DWU portion of the project. At September 30, 2013, DWU has recorded an intangible asset in progress of $68 million, including capitalized interest. The remaining $65 unspent proceeds held by TRWD were recorded in other noncurrent assets. On January 28, 2014, the Tarrant Regional Water District (TRWD) issued an additional $202.1 million in revenue bonds to fund the future costs of the DWU portion of the project. Water supply is now available to the City from six surface water impoundments, and from water in the Elm Fork of the Trinity River. The City has obtained most of its water supply through contractual agreements with surface reservoir operating entities. Water supply from the six reservoirs presently connected to the water system is adequate for current needs. DWU provides treated water to its customers within the City on a retail basis. Treated and untreated water is provided on a wholesale basis to other cities and governmental entities outside of Dallas. A small portion of the City s wastewater is treated by the Trinity River Authority. 7

92 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) MANAGEMENT S DISCUSSION AND ANALYSIS (UNAUDITED) September 30, 2013 CAPITAL ASSETS AND DEBT ADMINISTRATION - Continued Debt At year-end, DWU had $2.1 billion in revenue bonds (including premiums) outstanding. This represents a 3% increase over The DWU share of pension obligation bonds was $79 million (including premium of $23.5 million) plus $23.3 million of accreted interest. During September 2013, DWU issued Waterworks and Sewer System Revenue Refunding Bonds Series 2013 of $156.5 million with an interest rate range of 2 to 5 percent and a final maturity of October 1, The bonds were issued to refund outstanding commercial paper used by DWU to fund capital construction projects. The DWU Waterworks and Sewer System Revenue Refunding and Improvement Bonds underlying ratings are Aa1 by Moody s Investors Service and AAA by Standard & Poor s. See Note 5 for additional information. ECONOMIC FACTORS AND NEXT YEAR S BUDGETS AND RATES Retail water and wastewater rates were increased 5.1% in the fiscal year 2013 budget. With the multitude of water challenges across Texas, the City will continue to focus on maintaining infrastructure, conserving resources, and providing for future needs through replacement of aged water and wastewater mains; improvements at water treatment plants to improve reliability and water quality as well as increase capacity; continued water conservation efforts; and the TRWD integrated pipeline project to connect Lake Palestine to Dallas water supply system to meet future needs. In order to achieve these goals, it was necessary to implement a water rate increase. CONTACTING THE DALLAS WATER UTILITIES FINANCIAL MANAGEMENT The financial report is designed to provide our citizens, taxpayers, customers, investors and creditors with a general overview of the DWU finances and to demonstrate accountability for the money it receives. If you have questions about this report or need any additional financial information, contact the City Controller s Office, at City of Dallas, 1500 Marilla, Room 2BS, Dallas, Texas

93 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) STATEMENT OF NET POSITION As of September 30, 2013 (in thousands) ASSETS CAPITAL ASSETS Completed utility plant $ 5,401,235 Less accumulated depreciation and amortization (1,736,201) Total completed utility plant, net 3,665,034 Construction in progress 545,536 Total capital assets 4,210,570 CURRENT ASSETS Cash and cash equivalents 145,921 Accounts receivable, less allowance for uncollectible accounts ($11,867) 64,232 Interest receivable 462 Inventories, at cost 11,595 Due from other city funds 352 Prepaid assets 454 Other assets 120 Restricted assets Customer assessment receivable 625 Held for construction purposes Cash and cash equivalents 45,190 Debt service Pooled cash and cash equivalents 131,479 Customer deposits Pooled cash and cash equivalents 11,955 Total current assets 412,385 OTHER NONCURRENT ASSETS Future pipeline reserve capacity rights 65,393 Notes receivable from other city funds 6,892 Net pension asset 78,728 Restricted assets Cash and cash equivalents held by escrow agent for future debt service 14,770 Pooled cash and cash equivalents for future debt service 15,772 Investments for future debt service 80,130 Total noncurrent assets 261,685 Total assets 4,884,640 DEFERRED OUTFLOWS OF RESOURCES Deferred loss on refunding 25,626 Total assets and deferred outflows of resources $ 4,910,266 See accompanying notes to basic financial statements. 9

94 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) STATEMENT OF NET POSITION - CONTINUED As of September 30, 2013 (in thousands) LIABILITIES Long-term debt, less current maturities Revenue bonds payable $ 2,016,107 Water transmission facilities financing agreement, payable from restricted assets 126,475 Pension obligation bonds 76,602 Accreted interest pension obligation bonds 23,333 Total long-term debt 2,242,517 Current liabilities payable from restricted assets Water transmission facilities financing agreement 2,530 Construction accounts payable 69,428 Current maturities of revenue bonds 89,510 Accrued interest 41,024 Total current liabilities (payable from restricted assets) 202,492 Current liabilities payable from current assets Accrued payroll 2,914 Accounts payable 17,408 Compensated absences 4,890 Current maturity of pension obligation bonds 2,369 Accrued interest pension obligation bonds 231 Total current liabilities (payable from current assets) 27,812 Other long-term liabilities Customer deposits, payable from restricted assets 12,051 Compensated absences 6,227 Other postemployment benefits 24,288 Customer and developer construction advances 1,879 Total other long-term liabilities 44,445 Total liabilities 2,517,266 NET POSITION Net investment in capital assets 2,011,972 Restricted: Revenue bond requirements 186,126 Unrestricted 194,902 Total net position $ 2,393,000 See accompanying notes to basic financial statements. 10

95 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET POSITION For the Year ended September 30, 2013 (in thousands) Operating revenues: Water $ 330,006 Wastewater 221,487 Intergovernmental 5 Total operating revenues 551,498 Operating expenses: Personnel services 86,839 Supplies and materials 82,874 Other operation and maintenance 89,843 Depreciation and amortization 105,528 Total operating expenses 365,084 Operating income 186,414 Non-operating income (expenses) Investment income 1,127 Interest expense on bonds and commercial paper (71,164) Loss on property disposal (610) Total non-operating income (expenses) (70,647) Income before capital contributions and transfers 115,767 Capital contributions 11,411 Transfers in from other city funds 1,560 Transfers out to other city funds (20,568) Change in net position 108,170 Net position, beginning of year 2,284,830 Net position, end of year $ 2,393,000 See accompanying notes to basic financial statements. 11

96 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) STATEMENT OF CASH FLOWS For the Year Ended September 30, 2013 (in thousands) Cash flows from operating activities: Cash received from customers $ 552,414 Cash payments to suppliers for goods and services (83,261) Cash payments to employees for services (79,105) Cash payments for contractual services (86,106) Net cash provided by operating activities 303,942 Cash flows from non-capital financing activities: Transfers from other funds 949 Transfers to other funds (20,568) Principal paid on pension obligation bonds (1,823) Interest paid pension obligation bonds (4,004) Net cash used in non capital financing activities (25,446) Cash flows from capital and related financing activities: Acquisition and construction of capital assets (246,552) Proceeds from sale of revenue refunding bonds 165,448 Principal paid on bond maturities (96,115) Principal paid on Water Transmission Facilities Agreement (2,705) Interest paid on bonds, notes and Water Transmission Facilities Agreement (86,531) Bond issuance costs (448) Prepaid construction costs (454) Proceeds from sale of commercial paper notes 165,000 Retirement of commercial paper notes (165,000) Net cash used in capital and related financing activities (267,357) Cash flows from investing activities: Purchase of investments (50,078) Maturity of investments 34,000 Investment income 2,272 Net cash provided by investing activities (13,806) Net decrease in cash and cash equivalents (2,667) Cash and cash equivalents, beginning of year 367,754 Cash and cash equivalents, end of year $ 365,087 See accompanying notes to basic financial statements. 12

97 Reconciliation of operating income to net cash provided by operating activities: City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) STATEMENT OF CASH FLOWS - CONTINUED For the Year Ended September 30, 2013 (in thousands) Operating income $ 186,414 Adjustments not affecting cash: Depreciation and amortization 105,528 Change in assets and liabilities Decrease in accounts and other receivables 1,906 Decrease in notes receivable from other funds 361 (Increase) in inventories (387) Decrease in other assets 2,162 Increase in accounts payable 4,001 Increase in accrued payroll 343 Increase in compensated absences 570 (Decrease) in allowance for doubtful accounts (2,534) Increase in customer deposits 1,183 Increase in other postemployment benefits 4,659 (Decrease) in customer construction and developer advances (264) Total adjustments 117,528 Net cash provided by operating activities 303,942 Current Assets: Pooled cash and cash equivalents 145,921 Pooled cash and cash equivalents for current debt service 131,479 Customer deposits pooled cash and cash equivalents 11,955 Held for construction purposes: Cash and cash equivalents 45,190 Cash and cash equivalents held by escrow agent for future debt service 14,770 Pooled cash and cash equivalents for future debt service 15,772 Total cash and cash equivalents end of year $ 365,087 Noncash investing, capital, and financing activities: Capital contributions 11,411 Capital assets transferred from Airport Revenues Fund 611 Change in fair value of non-pooled investments (217) Change in fair value of pooled investments (567) Premium/discount amortization 13,026 Accretion on capital appreciation bonds 1,801 Amortization of deferred gain/loss on refunding 3,310 Capital assets acquired through water transmission financing agreement 59,642 Other assets acquired through water transmission financing agreement (59,642) See accompanying notes to basic financial statements. 13

98 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 1 - FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements include only Dallas Water Utilities (DWU), an enterprise fund of the City of Dallas, Texas (the City). The DWU financial statements are not intended to present the financial position or results of operations of the City. The City also administers other departments, whose operations are reflected in the Comprehensive Annual Financial Report of the City. However, certain disclosures are for the City as a whole, since such information is not available for the fund on a separate fund basis (see Notes 2, 11, 12, 13 and 14). DWU provides water and wastewater services to customers within the City and to other nearby cities and governmental entities. Chapter XI, Section 14 of the Dallas City Charter requires all costs of service to be paid from revenues arising from customer service rates. This City Charter section also establishes that all customer receipts and revenues shall be used only to provide water and wastewater services, and to provide for any charges made by the City in lieu of ad valorem taxes or that would be due the City if the Water Utilities Department were not a city-owned public utility. The accounting policies of DWU, as reflected in the accompanying accrual-basis financial statements, conform to accounting principles generally accepted in the United States of America (GAAP) for local government enterprises as prescribed by the Governmental Accounting Standards Board (GASB). The DWU is accounted for using the economic resources measurement focus. Revenues are recognized when earned and expenses are recognized when a liability is incurred, regardless of the timing of related cash flow. Cash and Cash Equivalents Cash includes amounts in demand deposits as well as short-term investments with original maturities of 90 days or less. DWU s portion of the City s investment pool is displayed on the statement of net position as cash and cash equivalents. DWU treats pooled investments and short-term non-pooled investments as cash equivalents. Long-term pooled investments are reported as investments on the statement of net position. Investments in U.S. government obligations and other investments are recorded at fair value based on quoted market prices (Note 2). Capital Assets Capital assets are stated at historical cost (estimated fair value for assets contributed by developers at the date of the contribution). Assets are capitalized when they generally have a value of at least five thousand dollars and a useful life of one year or more. Depreciation and amortization are provided using the straight-line method over estimated useful lives as shown below, stated in the number of years by property. Infrastructure and rights to water supply 50 to 100 Buildings 10 to 50 Improvements other than buildings 10 to 100 Equipment 3 to 25 Other utility property 33 to 75 14

99 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 1 - FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued For constructed property, capitalized costs include amounts applicable to construction for payroll, payrollrelated costs, and general and administrative overhead. Maintenance and repairs are charged to operations as incurred. Improvements which extend the useful lives of capital assets are capitalized. Interest costs during construction is capitalized. The accompanying financial statements reflect capitalization of interest costs of $17 million. Transactions with Other City Departments Operating revenues include billings and charges to other City departments for water and wastewater services, for which other departments made payments of $6.1 million in Operating expenses include payments to other City departments of $86.4 million in 2013, including health benefit payments for employees, office supplies, vehicle fuel and maintenance, communications and data services, programming and batch processing, street rental and other miscellaneous city services. DWU also reimburses other City departments for other construction-related costs paid by those departments for DWU. Current assets and other non-current assets at September 30, 2013 include advances of $6.9 million due from other City funds bearing original interest at rates of 1.5% to 4.3%, subject to change based on interest received on City investments. All other nonreciprocal transactions between funds which are not reimbursements and where the funds do not receive equivalent goods and services for the transactions are classified as transfers (i.e. payments in lieu of taxes). Compensated Absences The City s employees earn vacation up to maximum periods based on length of service. Employees may either take vacation leave or receive cash payment upon retirement or termination. Sick leave accrues to employees based on hours worked, up to an unused maximum accrual, but is subject to specified reduction if paid in cash upon retirement or termination. The City accrues vacation and sick leave attributable to employee services already rendered, in amounts of estimated payments. A liability is recorded for accumulated sick leave that is likely to vest, to the extent of probable payment upon termination for employees with 20 or more years of continuous service. At September 30, 2013, liabilities for accrued vacation and sick leave included the following amounts: Accounts Receivable Current Liabilities $4,890 Other Long-Term Liabilities 6,227 $11,117 Accounts receivable includes billed and unbilled customer receivables at September 30, Unbilled receivables include estimated revenues for water and wastewater services provided but not yet billed at September

100 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 1 - FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued Inventory Inventory consists of construction and operating materials, which are valued at average cost. Operating Revenues and Expenses Proprietary funds distinguish operating revenues and expenses from non-operating items. Operating revenues and expenses generally result from providing services and producing and delivering goods in connection with a proprietary fund s principal ongoing operations. The principal operating revenues of DWU are derived from treatment and supply of water, and collection of wastewater. Operating expenses for proprietary funds include the cost of services, administrative expenses and depreciation on capital assets. All revenues and expenses not meeting this definition are reported as non-operating revenues and expenses. Restricted vs. Unrestricted Restricted assets include debt service, investments for future debt service, cash held for construction purposes and customer deposits. Unrestricted assets can be used for any allowable purpose. When both restricted and unrestricted resources are available for use, it is the City s policy to use the restricted resources first and then unrestricted resources as they are needed. Deferred Outflows of Resources Deferred outflows of resources are used to report consumptions of net position by the government that are applicable to a future reporting period. Changes in Accounting Principles and New Accounting Pronouncements During fiscal year 2013, DWU adopted the following GASB Statements: GASB Statement Number 60, Accounting and Financial Reporting for Service Concession Arrangements was implemented by DWU as required by GASB during the fiscal year ending September 30, The statement improves financial reporting by addressing issues related to service concession arrangements (SCAs), which are a type of public-private or public-public partnership. The statement also provides guidance for governments that are operators in an SCA. The implementation of this statement had no effect on the financial statements of DWU. GASB Statement Number 61, The Financial Reporting Entity: Omnibus an amendment of GASB Statement No. 14 and No. 34 was implemented by DWU as required by GASB during the fiscal year ending September 30, This statement modifies certain requirements for inclusion of component units in the financial reporting entity and clarifies the manner in which that determination should be made and the types of relationships that generally should be considered in making the determination. The statement also amends the criteria for blending component units and provides additional guidance for blending a component unit if the primary government is a business-type activity and clarifies the reporting of equity interests in legally separate organizations. The implementation of this statement had no effect on the financial statements of DWU. 16

101 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 1 - FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued GASB Statement Number 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements was implemented by DWU as required by GASB during the fiscal year ending September 30, This statement incorporates into GASB s authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements: Financial Accounting Standards Board (FASB), Accounting Principles Board Opinions, and Accounting Research Bulletins of the American Institute of Certified Public Accountants (AICPA) Committee on Accounting Procedure. The requirements of this statement will improve financial reporting by contributing to the GASB s efforts to codify all sources of generally accepted accounting principles for state and local governments so they derive from a single source. The implementation of this statement had no effect on the financial statements of DWU. GASB Statement Number 66, Technical Corrections 2012 an amendment of GASB Statement No. 10 and No. 62, was implemented by DWU as required by GASB during the fiscal year ending September 30, This statement improves financial reporting by resolving conflicting accounting and financial reporting guidance that could diminish the consistency of financial reporting and thereby enhance the usefulness of the financial reports. This statement amends Statement No. 10, Accounting and Financial Reporting for Risk Financing and Related Insurance Issues, by removing the provision that limits fund-based reporting of an entity s risk financing activities to the general fund and the internal service fund type. This statement also amends Statement No. 62 by modifying the specific guidance on accounting for operating leases. The implementation of this statement had no effect on the financial statements of DWU. The GASB has issued the following statements which will be effective in futures years as described below: GASB Statement Number 67, Financial Reporting for Pension Plans an amendment of GASB Statement No. 25, will be implemented as required by GASB during the fiscal year ending September 30, The objective of this statement is to improve financial reporting by state and local government pension plans. The implementation of this statement will not result in any changes to the financial statements of DWU. GASB Statement Number 68, Accounting and Financial Reporting for Pensions an amendment of GASB Statement No. 27, will be implemented as required by GASB during the fiscal year ending September 30, The objective of this statement is to improve accounting and financial reporting by state and local government pensions and improve the decision-usefulness of information in contributing entity financial reports and will enhance its value for assessing accountability and interperiod equity by requiring recognition of the entire net pension liability and a more comprehensive measure of pension expense. This statement establishes standards for measuring and recognizing liabilities, deferred outflows of resources, and deferred inflows of resources, and expense/expenditures. Note disclosure and required supplementary information requirements about pensions also are addressed. This statement requires the liability of employers and nonemployer contributing entities to employees for defined benefit pensions (net pension liability) to be measured as the portion of the present value of projected benefit payments to be provided through the pension plan to current active and inactive employees that is attributed to those employees past periods of service (total pension liability), less the amount of the pension plan s fiduciary net position. The impact of the implementation of this statement is expected to be significant. 17

102 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 1 - FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES - Continued GASB Statement Number 69, Government Combinations and Disposals of Government Operations, will be implemented by the City as required by GASB during fiscal year ending September 30, This statement establishes accounting and financial reporting standards related to government combinations and disposals of government operations, which includes a variety of transactions referred to as mergers, acquisitions, and transfers of operations. The implementation of this statement is not expected to result in any changes to the financial statements of DWU. GASB Statement Number 70, Accounting and Financial Reporting for Nonexchange Financial Guarantees, will be implemented by the City as required by GASB during fiscal year ending September 30, The objective of this statement is to improve accounting and financial reporting by state and local governments that extend and receive nonexchange financial guarantees. The City is currently evaluating potential changes to the financial statements as a result of the implementation of this statement. GASB Statement Number 71, Pension Transition for Contributions Made Subsequent to the Measurement Date an Amendment of GASB Statement No. 68, will be implemented by the City as required by GASB during fiscal year ending September 30, The objective of this statement is to address an issue regarding application of the transition provisions of Statement No. 68, Accounting and Financial Reporting for Pensions. The City is currently evaluating potential changes to the financial statements as a result of the implementation of this statement. (The remainder of this page left blank intentionally) 18

103 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 2 - CASH, DEPOSITS, AND INVESTMENTS At September 30, 2013, the investments held for the DWU General and Investment Pool Programs are as follows: TYPES OF INVESTMENTS Total Categorized Investments Federal Agricultural Mortgage Corp. Notes $ 12,541 Federal Farm Credit Bank Notes 64,516 Federal Farm Credit Bank Notes Callable 2,497 Federal Home Loan Bank Notes 81,578 Federal Home Loan Bank Notes Callable 1,244 Federal Home Loan Mortgage Corp. Notes 79,871 Federal Home Loan Mortgage Corp. Notes Callable 24,988 Federal National Mortgage Association Notes 33,853 Federal National Mortgage Association Notes Callable 3,742 Total Categorized Investments $304,830 Investments Not Categorized Blackrock Munifund $ 2,538 First American Government Money Market Mutual Funds 14,770 Federated Tax Free Money Market Funds 1,175 AIM STIT Government and Agency Institution 784 Bank of America Money Market Funds 3,746 Morgan Stanley Prime Money Market Funds 11,237 Reserve Primary Fund 1 Western Asset Prime Money Market Funds 8,985 LOGIC Money Market Mutual Funds 19,977 TexStar Money Market Mutual Funds 6 TexPool Prime Money Market Mutual Funds 30,714 TexPool - Money Market Mutual Funds 1,020 Total Investments Not Categorized 94,953 Total General and Investment programs in City Treasury $399,783 Deposit and Investment Risk Disclosures of Funds with the City Treasurer GASB Statement No. 40, Deposit and Investment Risk Disclosures, requires disclosure information related to common risks inherent in deposit and investment transactions. Investments are subject to certain types of risks, including custodial credit risk, concentration of credit risk, credit risk and interest rate risk and foreign currency risk. Exposure of deposited funds and investment risk are disclosed in the following sections of this note. 19

104 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 2 - CASH, DEPOSITS, AND INVESTMENTS Continued Custodial Credit Risk Custodial credit is the risk that, in event of the failure of the counterparty, the City will not be able to recover the value of its deposit or collateral securities that are in the possession of an outside party. As of September 30, 2013, $45,435 was fully collateralized and insured by U.S. Federal Agency securities and the Federal Deposit Insurance Corporation. The collateral pledged to the City is held in the City s name at the Federal Reserve Bank. Texas statutes and City policy authorize operating, capital projects, bond reserve and trust monies to be deposited in demand deposits, time deposits, or certificates of deposits. Texas statues and City policy require all uninsured collected deposits to be fully collateralized. Concentration of Credit Risk Investments that individually represent 5% or more of net portfolio assets are stated below. Investments issued or explicitly guaranteed by the U.S. government and investments in mutual funds and external investment pools are excluded. % of Total Agency and Securities by Issuer Fair value Portfolio Federal National Mortgage Assoc. (FNMA) $ 37, % Federal Agricultural Mortgage Corp. (FAMC) 12, % Federal Home Loan Mortgage Corp. (FHLMC) 104, % Federal Home Loan Bank (FHLB) 82, % Federal Farm Credit Bank (FFCB) 67, % Credit Risk Total agency securities $304, % The Public Funds Investment Act requires that investments shall be made in accordance with written policies at least annually by the governing body; investment policies must address safety of principal, liquidity, yield, diversification and maturity, with primary emphasis on safety of principal. In accordance with this policy, the City may invest in direct or guaranteed obligations of the U.S. Treasury, certain U.S. agencies and instrumentalities, and the state of Texas or its agencies and instrumentalities with a credit rating no less than A; fully collateralized certificates of deposits and repurchase agreements; no-load money market mutual funds and local government investment pools with credit ratings no less than AAA. Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligations. Money Market Mutual Funds and Local Government Investment pools in the City s portfolio are rated AAAm by Standard and Poor s and/or Aaa by Moody s. Long-term bond ratings are used for the U.S. Government Agencies. Ratings for the City s portfolio are listed on the following table. 20

105 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 2 - CASH, DEPOSITS, AND INVESTMENTS - Continued % of Total S&P/Moody s Security Type Fair value portfolio ratings Money market mutual funds and pools $ 94, % AAAm/Aaa U.S. Agency securities 304, % AAA/Aaa Total portfolio $399, % Interest Rate Risk In order to ensure the ability of the City to meet obligations and to minimize potential liquidation losses, the dollar-weighted average stated maturity of the Investment Pool shall not exceed 1.5 years. The City s policy further limits the maximum stated maturity of U.S. treasuries, agencies, and municipal notes and bonds to 5 years; repurchase agreements to 30 days; and certificates of deposit to 1 year. The weighted average maturity of the securities held in the City s portfolio is as follows: Weighted average maturity Security type Fair value (days) Money market mutual funds and pools $ 94,953 1 U.S. Agency securities 304, Total portfolio $399, NOTE 3 - ASSETS RESTRICTED FOR DEBT SERVICE Bond documents authorizing issuance of water and wastewater system revenue bonds and the related offering documents prescribe the timing and determination of amounts to be accumulated and maintained for debt service. These ordinances require that amounts be set aside in advance to provide for the next scheduled principal and interest payments. Such amounts are reflected in the accompanying statement of net position as current maturities of revenue funds and accrued revenue bond interest. The ordinances also require that a revenue bond reserve fund be accumulated and maintained. If the reserve fund contains less than the future average annual principal and interest requirements of all outstanding revenue bonds, determined after each bond issue, the ordinances require equal monthly additions to the reserve fund in amounts which, after 60 months, will result in a reserve fund balance which is equal to the future average annual principal and interest requirements. At September 30, 2013, the reserve fund equaled or exceeded ordinance requirements. 21

106 NOTE 4 - CAPITAL ASSETS City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) Capital asset activity for the year ended September 30, 2013 is as follows: Balance, Transfers Balance, beginning and end of of year Additions Retirements year Capital assets, not being depreciated: Land $ 86,163 $ 2,227 $ - $ 88,390 Construction in progress 487, ,092 (250,883) 545,536 Total capital assets, not being depreciated 573, ,319 (250,883) 633,926 Capital assets, being depreciated: Water rights 353, ,910 Buildings 480,712 8, ,321 Improvements other than buildings 69, ,897 Infrastructure 446,233 95, ,332 Equipment 474,742 23,614 (871) 497,485 Utility property 3,249, ,190 (30,996) 3,360,900 Total capital assets, being depreciated 5,075, ,512 (31,867) 5,312,845 Less accumulated depreciation for: Water rights (102,188) (3,537) - (105,725) Buildings (177,807) (9,608) - (187,415) Improvements other than buildings (10,437) (1,664) - (12,101) Infrastructure (206,419) (8,249) - (214,668) Equipment (329,931) (19,196) 849 (348,278) Utility property (834,979) (63,274) 30,239 (868,014) Total accumulated depreciation (1,661,761) (105,528) 31,088 (1,736,201) Total capital assets being depreciated, net 3,413, ,984 (779) 3,576,644 Total capital assets, net $ 3,986,929 $ 475,303 $ (251,662) $ 4,210,570 NOTE 5 - LONG TERM DEBT Water and wastewater system revenue bonds constitute obligations of the DWU, secured solely by a pledge of all revenues of the City s water and wastewater system (operated as Dallas Water Utilities ), after deduction of reasonable operation and maintenance expenses. All DWU revenue bonds may be redeemed at the City s option, at par value, on or after the tenth annual serial maturity date. 22

107 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 5 LONG TERM DEBT - Continued DWU is also obligated to pay a proportionate share of the Pension Obligation Bonds issued by the City of Dallas. The payments include both City contributions and employee contributions. Revenue bonds payable at September 30, 2013 include the following issues. Future long term liabilities and interest rates shown on the following page are for bonds outstanding on September 30, Beginning Ending Due Within Balance Additions Deletions Balance One year Dallas Water Utilities City of Dallas Waterworks and Sewer System Revenue Refunding and Improvement Bonds Series 2003 $ 17,930 $ - $ 17,930 $ - $ - Series 2003A 7,325-7, Series ,615-11,005 15,610 15,610 Series ,010-7,200 88,810 7,550 Series ,500-31, ,140 36,735 Series ,790-2, ,825 3,065 Series 2009A 13, , Series 2009B 8, , Series 2009C 94,723-5,105 89,618 5,105 Series ,745-12, ,185 10,445 Series , ,425 4,440 Series , ,140 5,445 Series , ,540 - Total Revenue Bonds Payable 1,944, ,540 96,115 2,005,048 89,510 Add : Unamortized Premium 103,375 9,627 12, ,569 - Total Revenue Bonds for Water Utilities 2,047, , ,548 2,105,617 89,510 Pension Obligation Bonds 57,257-1,823 55,434 2,369 Add: Net Premium/Discount 24, ,537 - Add: Accretion on Capital Appreciation Bonds 21,532 3,956 2,155 23,333 - Total Water Utilities Bonds 2,150, , ,119 2,207,921 91,879 Other: Compensated Absences 10,547 6,023 5,453 11,117 4,890 Other: Postemployment Benefits 19,629 6,120 1,461 24,288 - Other: Water Transmission Facilities Financing Agreement 131,710-2, ,005 2,530 Total Long-Term Debt for Water Utilities $ 2,312,803 $ 182,266 $ 122,738 $ 2,372,331 $ 99,299 23

108 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 5 LONG TERM DEBT - Continued In September 2013, DWU issued Waterworks and Sewer System Revenue Refunding Bonds Series 2013 of $156.5 million with an interest rate range of 2 to 5 percent and a final maturity of October 1, The bonds were issued to refund outstanding commercial paper used by DWU to fund capital construction projects. At September 30, 2013, and during the year then ended, the City believes it was in compliance with the financial covenants of all authorizing ordinances for outstanding water and wastewater system revenue debt. The future principal and interest requirements of revenue bonds and pension obligation bonds attributed to DWU are shown on the table below: Dallas Water Utilities Fiscal Revenue Bonds Pension Obligation Bonds Year Principal Interest Total Principal Interest Total 2014 $ 89,510 $ 84,269 $ 173,779 $ 2,369 $ 3,570 $ 5, ,545 84, ,679 1,623 4,478 6, ,825 80, ,224 1,513 4,707 6, ,365 76, ,900 1,544 4,806 6, ,370 72, ,189 1,679 4,863 6, , , ,110 21,557 14,271 35, , , ,030 13,286 29,884 43, , , ,761 7,548 42,980 50, ,965 66, ,741 4,315 18,091 22, ,800 12, , $ 2,005,048 $ 1,125,831 $ 3,130,879 $ 55,434 $ 127,650 $ 183,084 Dallas Water Obligation for Water Transmission Facilities Financing Agreement TRWD, a water control and improvement district and political subdivision of the State of Texas, issued $131.9 million in Water Facilities Contract Revenue Bonds during February The bonds were issued to finance the DWU share of costs for designing, acquiring, constructing, improving, repairing, rehabilitating, and or replacing water transmission facilities capable of delivering additional raw water supply to the customers of the DWU and TRWD for their respective customers (the Project). The Project is tentatively scheduled to be completed in The City s share of the total cost of the Project is estimated to be $832 million. Upon completion of the Project, DWU will have reserved capacity rights in the amount of 150 million gallons per day. Depending on the timing of construction, additional bonds are expected to be issued throughout the construction period. 24

109 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 5 LONG TERM DEBT - Continued In order to ensure adequate funding from DWU for the payment of principal and interest, the City entered into a separate funding agreement with TRWD, a Water Transmission Facilities Financing Agreement (the Agreement). Under this Agreement, the City is obligated to make payments to TRWD for the principal and interest amounts associated with the bonds. The Agreement establishes through State statutes that those payments will be treated as operating and maintenance expenses. This interpretation of the treatment of payments to TRWD as operating and maintenance expenses is only being applied to the schedule of revenue bond coverage for the DWU and for purposes of establishing rates. The Agreement establishes that TRWD shall own and operate the Project, subject to Dallas reserved capacity rights in the Project. The bonds are a special obligation of TRWD. Principal and interest are secured by and payable solely from payments to be received by TRWD from the City to the extent required and provided in the Agreement. The bonds do not constitute a debt or pledge of the faith and credit of the City and accordingly have not been reported in the accompanying financial statements. At September 30, 2013, the TRWD Water Facilities Contract Revenue Bonds outstanding was $129.2 million. The City has determined the obligation under the Agreement to be a liability to the extent that such obligations are for the payment of bonds issued to fund the DWU share of costs for the Project. The City has capitalized the development of an intangible asset, Pipeline Reserved Capacity Rights, in Construction in Progress for the actual Project costs incurred by TRWD. The unspent proceeds held by TRWD for future construction costs have been recorded in Other Noncurrent Assets Future Pipeline Reserved Capacity Rights. The interest rates for the obligation range from 2% to 5%. The obligation will be amortized over a period of 30 years. The balance of the obligation for the Agreement was $129 million at September 30, The schedule of principal and interest payments required for the obligation is provided below: Fiscal Year Principal Interest Total 2014 $ 2,530 $ 5,149 $ 7, ,835 5,066 7, ,895 4,953 7, ,955 4,808 7, ,015 4,660 7, ,030 20,978 37, ,895 17,265 36, ,000 13,952 36, ,890 9,172 38, ,960 2,848 30,808 $ 129,005 $ 88,851 $ 217,856 25

110 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 6 - OTHER LONG TERM OBLIGATIONS Other long-term obligations are as follows as of September 30, 2013: Balance, Balance, beginning end of of year Additions Deletions year Customer deposits, payable from restricted assets $ 10,868 $ 2,465 $ 1,282 $ 12,051 Customer and developer construction advances 2,143 1,472 1,736 1,879 Total other long-term obligations $ 13,011 $ 3,937 $ 3,018 $ 13,930 NOTE 7 - COMMERCIAL PAPER NOTES PAYABLE The commercial paper notes are supported by three liquidity agreements through three banks and one pension fund. The Series B and Series C programs have liquidity agreements with Bank of America, N.A., and JPMorgan Chase Bank, National Association, which was extended to September 30, The liquidity program supporting Series B has an aggregate available principal amount not to exceed $214.8 million, which includes $200 million of principal together with $14.8 million of accrued interest for a period of 270 days at the rate of 10% per annum. The liquidity agreement supporting Series C notes has an aggregate available principal amount not to exceed $107.4 million, which includes $100 million of principal together with $7.4 million of accrued interest for a period of 270 days at the rate of 10% per annum. The liquidity agreement supporting the Series D notes is through State Street Bank and Trust and the California State Teachers Retirement System and extends to March 16, The Series D has an aggregate principal amount not to exceed $326.6 million, which includes $300 million of principal together with $26.6 million of accrued interest for a period of 270 days at the rate of 12% per annum. All three commercial paper programs constitute an obligation subordinate to the City s water and wastewater system revenue bonds. Any advances for payments of commercial paper under the line of credit are secured by a subordinate lien on water and wastewater revenues. During fiscal year 2013, $165 million was issued and $165 million was refunded. Changes in short-term obligations during fiscal year 2013 were as follows: Beginning Ending Balance Additions Deletions Balance Commercial Paper $ - $ 165,000 $ (165,000) $ - 26

111 NOTE 8 - COMMITMENTS City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) At September 30, 2013, commitments under construction contracts in progress and operating encumbrances were outstanding in the following amounts: Construction Encumbrances $ 236,245 Operating Encumbrances 3,130 $ 239,375 For purposes of its water supply system, the City is contractually committed to pay a portion of the net operating and maintenance expenses of several reservoirs operated by other governmental agencies or authorities. The City is also contractually committed to pay a portion of the net operating and maintenance expenses of the Trinity River Authority s Regional Wastewater System (the Authority ). The contract with the Authority provides in effect that amounts of capital obligation, interest, and operation and maintenance expenses vary with Dallas proportionate share of total wastewater treated by the Authority s Central Regional Wastewater System. NOTE 9 - CONTINGENCIES Various claims and lawsuits are pending against the City. Those judgments which are considered probable and estimable are accrued, while those claims and judgments which are considered reasonably possible are disclosed but not accrued. In the opinion of the City Attorney, the potential loss resulting from all significant claims which are considered reasonably possible, excluding condemnation proceedings, is approximately $8.1 million as of September 30, At September 30, 2013, approximately $6.7 million has been recorded in the risk funds for claims and lawsuits considered to be probable. None of these amounts is attributable to DWU. NOTE 10 - LEASES As Lessee As lessee, DWU is committed under various leases for building and office space, data processing and communications equipment. These leases are considered for accounting purposes to be operating leases. Year ending Rental September 30 Payments 2014 $ $2,824 27

112 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 10 LEASES Continued As Lessor As lessor DWU is also under several lease agreements whereby it receives revenues from leasing land, building and water front facilities. These revenue leases are considered for accounting purposes as operating leases. Year ending Rental September 30 Receipts 2014 $ Thereafter 41 Minimum future rentals $693 NOTE 11 - PENSION PLAN All full-time DWU employees participate in the contributory City Employees Retirement Fund, a defined benefit, single employer pension plan ( the Plan ). The Plan is administered by the City. Membership is a condition of employment for all full-time, permanent employees. Chapter 40A of the City Code provides legal authority for the Plan, which is for the benefit of all eligible employees of the City, excluding firefighters and police officers. Members have vested rights to retirement benefits after five years of service. Benefits are based on credited service and the average monthly earnings for the three highest paid calendar years. Members of the Fund are entitled to normal retirement pension at age 60; early retirement pension at age 55 if employed prior to May 9, 1972 or age 50 and years of service total 78; service retirement pension at any age after 30 years of credited service and disability retirement pension as determined by the Board of Trustees. Contribution percentages of covered wages are 11.87% for employees and 20.21% for the City. The City s contribution of 20.21% is divided into 10.48% cash to the Plan and 9.73% for debt service payments on the pension obligation bonds. The maximum contribution percentage of covered wages is 36%, with 63% from the City and 37% from employees. The maximum increase or decrease from one year to the next is 10%. 28

113 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 11 - PENSION PLAN - Continued 2012 Membership Retirees and beneficiaries currently receiving benefits and inactive members entitled to benefits but not yet receiving them 7,363 Current members: Vested 4,843 Nonvested 2,021 Total current members 6,864 Total membership 14,227 Employer contribution information for all Plan members is presented in the schedule below: Schedule of Employer Contributions Employees' Retirement Fund Employees' Retirement Fund Annual Annual Required Percentage Pension Percentage Contribution Contribution Cost Contributed 9/30/2013 $ 54, % 9/30/2013 $ 46, % 9/30/2012 $ 37, % 9/30/2012 $ 30, % 9/30/2011 $ 32, % 9/30/2011 $ 25, % Significant Actuarial Methods and Assumptions Assumptions Employees retirement fund Actuarial valuation date 12/31/2012 Actuarial cost method Entry age Amortization method Level percentage Asset valuation method 5-year smoothed market Remaining amortization period 30 years Open Period Investment rate of return 8.25% Inflation rate 3.00% Projected salary increase 3.00%-7.00% Projected post-retirement benefit increase 3.00% 29

114 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 11 - PENSION PLAN Continued City-Wide Net Pension Asset (NPA) for 2013, 2012 and /30/2013 9/30/2012 9/30/2011 Annual Required Contribution (ARC) $ 54,289 $ 37,822 $ 32,865 Interest on NPA (35,109) (35,231) (35,080) Adjustment to the ARC 27,706 27,802 27,683 Annual Pension Cost 46,886 30,393 25,468 Contribution Made (35,515) (28,917) (27,303) Change in NPA 11,371 1,476 (1,835) NPA, Beginning of Year (425,570) (427,046) (425,211) NPA, End of Year $ (414,199) $ (425,570) $ (427,046) The amounts above are calculated as of DWU s fiscal year-end, September 30, rather than the year-end of the Dallas Employees Retirement Fund, December 31. The net pension obligation (asset) has been allocated between governmental activities and business type activities based on percentage of contribution by each. The DWU share of the net pension asset is $78,728. The percent contributed may vary from the legally required rate as the annual required contributions are based upon covered payroll as of the actuarial valuation date, January 1, whereas contributions are calculated and paid based upon actual payrolls throughout the year. NOTE 12 - RISK MANAGEMENT ESTIMATED CLAIMS AND JUDGEMENT PAYABLE The City is self-insured for all third-party general liability claims. Claims adjusting services are provided by the City s internal staff. Interfund premiums are based primarily upon the insured fund s claims experience and exposure and are reported as cost reimbursement inter-fund transactions. The amount paid by DWU was $717 thousand in fiscal year The liability for unpaid claims includes the effects of specific incremental claims, adjustment expenses and if probable material, salvage and subrogation. All known City property, primarily buildings and contents, is insured through commercial insurance policies, subject to a $1 million deductible per loss occurrence. The amount of settlements has not exceeded the deductible loss per occurrence for the past two fiscal years. 30

115 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 12 - RISK MANAGEMENT ESTIMATED CLAIMS AND JUDGEMENT PAYABLE - Continued The City is self insured for workers compensation claims that occurred prior to October 1, Effective October 1, 1999, the City is insured for workers compensation losses in excess of $750 thousand per occurrence. Claims adjusting services are provided by an independent administrative services contractor. Workers compensation premiums are based primarily upon the insured funds claims experience and exposure and are reported as cost reimbursement interfund transactions. The amount paid by DWU was $880 in fiscal year All workers' compensation losses are accumulated in a clearing fund which is being reimbursed by the premiums collected. When losses exceed premiums, the deficiencies are prorated and supplemented by the various applicable funds. Accrued worker s compensation liability consists of incurred but not reported as well as unpaid reported claims of which $41.2 million at September 30, 2013, is recorded in the risk funds of the City. Of this amount, $8 million is estimated to be payable in the next fiscal year. The City maintains a group health insurance plan for employees and dependents which is self-insured by the City. The City also offers enrollment in one health maintenance organization as an alternative. Premiums are determined based on the annual budget. DWU expensed $7.8 million in fiscal year The City also maintains a group life insurance plan, which offers term-life and accidental death and dismemberment benefits for employees and dependents. The City is fully insured for employee term-life. Health claims and claims incurred but not reported that are probable and reasonably estimated are accrued at September 30, 2013, in the amount of $7 million in the risk funds. At September 30, 2013, the City estimates its general liability at $16.8 million, which includes $10.1 million for automobile and general liability and $6.7 million for probable claims and lawsuits. Of this amount, $9.3 million is estimated to be payable in the next fiscal year. (See Note 9.) Changes in the balances of claims liabilities during the past fiscal year are as follows: Workers' General Compensation Health Liability Unpaid claims, beginning of year $ 41,951 $ 51,591 $ 9,556 $ 8,479 $ 12,897 $ 13,313 Incurred claims, including incurred but not reported claims (IBNRs) and changes in estimates) 9,133 1, , ,074 14,387 6,956 Claim payments (9,884) (11,205) (107,415) (106,997) (10,514) (7,372) Unpaid claims, end of year $ 41,200 $ 41,951 $ 7,016 $ 9,556 $ 16,770 $ 12,897 31

116 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 13 - OTHER POST-EMPLOYMENT BENEFITS In addition to pension benefits, various Council resolutions require the City to provide certain healthcare and life insurance benefits for retired employees. Employees who are permanent, full-time employees are eligible to participate in the benefits at retirement. The City is self-insured for these programs. For retired employees over 65, the City pays on average $450 (not in thousands) per month for Medicare A if the retirees are not eligible for Social Security coverage. The retirees are responsible for Medicare B. For retirees who qualify and choose the City health plan, the City pays approximately 50 percent of the retiree premium and the retiree pays the other 50 percent. Spouses of retirees, like active employees, pay 100% of premiums. There were 4,615 retired participants in the health plan at October 1, 2012, the latest data used for this evaluation. An actuarial evaluation can be performed every other year; therefore, new data was not collected but updated claims and assumptions were used. The City s annual other postemployment benefit (OPEB) expense is calculated based on the annual required contribution (ARC), an amount actuarially determined in accordance with GASB Statement No. 45. The actuarial cost method used in this valuation to determine the actuarial accrued liability and the annual required contribution (ARC) is the projected unit credit method with service prorated. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities over a period not to exceed 30 years. The City has elected to amortize the unfunded actuarial liability over 30 years as a level percentage of payroll on an open basis. The discount rate used for the determination of the expense for fiscal year 2013 is 4%. The inflation rate assumption used is 4.5% per year. Total claim payments for fiscal year 2013 were approximately $12.5 million net of participants and pension plans contributions. Actuarial Valuations Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the City are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the City and plan members) and include the types of benefits provided at the time of each valuation. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. 32

117 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 13 - OTHER POST-EMPLOYMENT BENEFITS - Continued The following table shows the components of the City s annual OPEB cost for fiscal years 2013, 2012 and 2011, the amount actually contributed to the plan, and changes in the City s net OPEB obligation (in thousands): Annual OPEB Cost $ 49,852 $ 50,094 $ 47,529 Contributions Made (12,476) (6,240) (17,559) Increase in net OPEB 37,376 43,854 29,970 Net OPEB Obligation, beginning of year 170, ,232 96,262 Net OPEB Obligation, end of year $ 207,462 $ 170,086 $ 126,232 The DWU share of the OPEB Obligation is $24,288. The City s annual OPEB cost, the percentage of annual OPEB cost contributed to the plan, and the net OPEB obligation for fiscal years 2013, 2012 and 2011 are as follows (in thousands): Net OPEB Net OPEB Obligation Obligation Fiscal Year Beginning Annual Employer End of Annual OPEB Ended of Year OPEB Cost Contributions Year Cost Contributed 2013 $ 170,086 $ 49,852 $ 12,476 $ 207, % 2012 $ 126,232 $ 50,094 $ 6,240 $ 170, % 2011 $ 96,262 $ 47,529 $ 17,559 $ 126, % The funded status of the plan for fiscal years 2013, 2012 and 2011 are as follows: Actuarial Actuarial Actuarial Unfunded Percentage of Valuation Value of Accrued AAL Funded Covered Covered Date Assets Liability (AAL) (UAAL) Ratio Payroll Payroll 10/1/2012 $ - $ 635,815 $ 635, % N/A N/A 10/1/2011 $ - $ 627,980 $ 627, % N/A N/A 10/1/2010 $ - $ 594,437 $ 594, % N/A N/A 33

118 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 13 - OTHER POST-EMPLOYMENT BENEFITS Continued The actuarial accrued liability of $635,815 includes $384,632 for active employees and $251,183 for retirees. This table presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liabilities for benefits. Non- At October 1, 2012, membership was as follows Uniformed Uniformed Total (not in thousands): Active participants not eligible to retire 3,201 6,413 9,614 Active participants eligible to retire 2,201 1,223 3,424 Total active participants 5,402 7,636 13,038 NOTE 14 - DEFERRED COMPENSATION PLANS There are three deferred compensation plans. Two of these plans are voluntary for City employees who participate in the City s pension plans. The third plan is mandatory for all employees and council members who are not covered by the City s pension plans. These plans comply with sections 401(k) and 457(b) of the Internal Revenue Code. Participants in the City s voluntary 457 and 401(k) plans have full discretion to choose investments from a list of standard plan options, a linked brokerage account, and a commingled pool managed by Fidelity Management Trust Company. The list of standard plan options includes mutual funds with varying styles and levels of investment risk. All the account balances in the mandatory 457 plan are invested in the same commingled pool. All contributions to these plans are deferred by plan participants from their compensation and all the earnings are allocated to each participant s account. Distributions from all the deferred compensation plans are available after termination of employment. Additionally, participants in the City s voluntary plans may also take out loans and may receive hardship withdrawals in accordance with federal regulations. The assets held in these plans are not included in the City s or the DWU financial statements and cannot be used for purposes other than the exclusive benefit of the participants or their beneficiaries or to pay the reasonable expenses of plan administration. 34

119 City of Dallas, Texas Dallas Water Utilities (An Enterprise Fund of the City of Dallas) NOTES TO THE BASIC FINANCIAL STATEMENTS - CONTINUED For the Year Ended September 30, 2013 (In thousands except where indicated) NOTE 15 - INTERFUND TRANSFERS During the year, transfers out to other City funds were made in the amount of $20.6 million for payment in lieu of taxes (PILOT) and DWU s portion of the pension obligation bond debt service, which are recorded as transfers, rather than operation and maintenance expenses, due to the nonreciprocal nature of the transactions. Under the terms of the bond ordinance, any PILOT payments and any other similar payments are not considered expenses of operation and maintenance of the fund. Additionally, they are not included in the debt coverage calculation. During the year, transfers in from other City funds were made in the amount of $1.6 million for debt service reimbursements related to software acquisition and assets constructed by other proprietary funds of the City for the DWU. NOTE 16 - SUBSEQUENT EVENTS From October 1, 2013 through July 31, 2014, DWU issued $91.8 million in commercial paper notes, with an average interest rate of 0.08%. On January 28, 2014, the Tarrant Regional Water District (TRWD) issued $202.1 million in revenue bonds with a weighted average interest rate of 5.09%, related to the Dallas Water Utilities Obligation for Water Transmission Facilities Financing Agreement mentioned in Note 5. The bonds were issued to finance the Dallas Water Utilities share of costs for designing, acquiring, constructing, improving, repairing, rehabilitating and or replacing water transmission facilities capable of delivering additional raw water to supply the customers of the Dallas Water Utilities and the TRWD for their respective customers. 35

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121 APPENDIX D FORMS OF CO-BOND COUNSEL S OPINIONS

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123 Proposed Form of Opinion of Co-Bond Counsel An opinion in substantially the following form will be delivered by McCall, Parkhurst & Horton L.L.P. and Escamilla & Poneck, LLP, Co-Bond Counsel, upon the delivery of the Bonds, assuming no material changes in facts or law. CITY OF DALLAS, TEXAS WATERWORKS AND SEWER SYSTEM REVENUE REFUNDING BONDS, SERIES 2015A AS CO-BOND COUNSEL for the City of Dallas, Texas (the "City"), the issuer of the bonds described above (the "Bonds"), we have examined into the legality and validity of the Bonds, which Bonds are issued in the aggregate principal amount of $453,630,000. The Bonds bear interest from their date of delivery and mature on the dates specified on the face of the Bonds, and are subject to redemption prior to maturity on the dates and in the manner specified in the Bonds, all in accordance with the ordinance of the City authorizing the issuance of the Bonds (the "Ordinance"). Terms used herein and not otherwise defined shall have the meaning given in the Ordinance. WE HAVE EXAMINED the Constitution and Statutes of the State of Texas, the City Charter of the City, certified copies of the proceedings of the City Council of the City, and other proofs authorizing and relating to the issuance of the Bonds, including one of the executed Bonds (Bond Number R-1); we do not, however, express any opinion with regard to any statement of insurance printed on the Bonds. IN OUR OPINION, the Bonds have been authorized and issued in accordance with law, and constitute valid and legally binding special obligations of the City; and, except as may be limited by laws applicable to the City relating to bankruptcy, reorganization, and other similar matters affecting creditors' rights, and the exercise of judicial discretion in accordance with general principles of equity, that the interest on and principal of the Bonds, together with outstanding parity bonds, are payable from, and secured by a first lien on and pledge of, the Pledged Revenues, which include the Net Revenues of the City's combined Waterworks and Sewer System. All such revenue bonds are secured ratably by such pledge of revenues in such manner that no one Bond shall have priority of lien over any other Bond so secured. The holder or holders of the Bonds shall never have the right to demand payment out of money raised or to be raised by taxation. THE CITY reserves the right, subject to the restrictions stated, and adopted by reference, in the Ordinance, to issue additional parity obligations payable from and equally secured by a lien on and pledge of the Pledged Revenues in all things on a parity with the Bonds. IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Bonds is excludable from the gross income of the owners for federal income tax purposes under the statutes, regulations, published rulings, and court decisions existing on the date of this opinion. We are further of the opinion that the Bonds are not "specified private activity bonds" and that, accordingly, interest on the Bonds will not be included as an individual or corporate alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the "Code"). In expressing the aforementioned opinions, we have relied on certain representations, the accuracy of which we have not independently verified, and assume compliance with certain covenants, regarding the use and investment of the proceeds of the Bonds and the use of the property financed therewith. In addition, we have relied upon the report of Grant Thornton LLP, independent certified public accountants, with respect to certain D-1

124 arithmetical and mathematical computations relating to the Bonds and the obligations refunded with the proceeds of the Bonds. We call your attention to the fact that if such representations are determined to be inaccurate or upon a failure by the City to comply with such covenants, interest on the Bonds may become includable in gross income retroactively to the date of issuance of the Bonds. EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state, or local tax consequences of acquiring, carrying, owning, or disposing of the Bonds. WE CALL YOUR ATTENTION TO THE FACT that the interest on tax-exempt obligations, such as the Bonds, is included in a corporation's alternative minimum taxable income for purposes of determining the alternative minimum tax imposed on corporations by section 55 of the Code. WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due for the principal of and interest on the Bonds, nor as to any such insurance policies issued in the future. OUR SOLE ENGAGEMENT in connection with the issuance of the Bonds is as co- Bond Counsel for the City, and, in that capacity, we have been engaged by the City for the sole purpose of rendering an opinion with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, and with respect to the exclusion from gross income of the interest on the Bonds for federal income tax purposes, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to investigate or verify, and have not independently investigated or verified any records, data, or other material relating to the financial condition or capabilities of the City, or the disclosure thereof in connection with the sale of the Bonds, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Bonds and have relied solely on certificates executed by officials of the City as to the availability and sufficiency of the Pledged Revenues. Our role in connection with the City's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on the Internal Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures the Service is likely to treat the City as the taxpayer. We observe that the City has covenanted not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes. Respectfully, D-2

125 Proposed Form of Opinion of Co-Bond Counsel An opinion in substantially the following form will be delivered by McCall, Parkhurst & Horton L.L.P. and Escamilla & Poneck, LLP, Co-Bond Counsel, upon the delivery of the Bonds, assuming no material changes in facts or law. CITY OF DALLAS, TEXAS WATERWORKS AND SEWER SYSTEM REVENUE REFUNDING BONDS, TAXABLE SERIES 2015B AS CO-BOND COUNSEL for the City of Dallas, Texas (the "City"), the issuer of the bonds described above (the "Bonds"), we have examined into the legality and validity of the Bonds, which Bonds are issued in the aggregate principal amount of $150,630,000. The Bonds bear interest from their date of delivery and mature on the dates specified on the face of the Bonds, and are subject to redemption prior to maturity on the dates and in the manner specified in the Bonds, all in accordance with the ordinance of the City authorizing the issuance of the Bonds (the "Ordinance"). Terms used herein and not otherwise defined shall have the meaning given in the Ordinance. WE HAVE EXAMINED the Constitution and Statutes of the State of Texas, the City Charter of the City, certified copies of the proceedings of the City Council of the City, and other proofs authorizing and relating to the issuance of the Bonds, including one of the executed Bonds (Bond Number R-1); we do not, however, express any opinion with regard to any statement of insurance printed on the Bonds. IN OUR OPINION, the Bonds have been authorized and issued in accordance with law, and constitute valid and legally binding special obligations of the City; and, except as may be limited by laws applicable to the City relating to bankruptcy, reorganization, and other similar matters affecting creditors' rights, and the exercise of judicial discretion in accordance with general principles of equity, that the interest on and principal of the Bonds, together with outstanding parity bonds, are payable from, and secured by a first lien on and pledge of, the Pledged Revenues, which include the Net Revenues of the City's combined Waterworks and Sewer System. All such revenue bonds are secured ratably by such pledge of revenues in such manner that no one Bond shall have priority of lien over any other Bond so secured. The holder or holders of the Bonds shall never have the right to demand payment out of money raised or to be raised by taxation. THE CITY reserves the right, subject to the restrictions stated, and adopted by reference, in the Ordinance, to issue additional parity obligations payable from and equally secured by a lien on and pledge of the Pledged Revenues in all things on a parity with the Bonds. IT IS OUR OPINION THAT THE BONDS ARE NOT OBLIGATIONS DESCRIBED IN SECTION 103(a) OF THE INTERNAL REVENUE CODE OF EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state, or local tax consequences of acquiring, carrying, owning, or disposing of the Bonds. In particular, but not by way of limitation, we express no opinion with respect to the federal, state or local tax consequences arising from the enactment of any pending or future legislation. WE EXPRESS NO OPINION as to any insurance policies issued with respect to the payments due for the principal of and interest on the Bonds, nor as to any such insurance policies issued in the future. D-3

126 OUR SOLE ENGAGEMENT in connection with the issuance of the Bonds is as co- Bond Counsel for the City, and, in that capacity, we have been engaged by the City for the sole purpose of rendering an opinion with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to investigate or verify, and have not independently investigated or verified any records, data, or other material relating to the financial condition or capabilities of the City, or the disclosure thereof in connection with the sale of the Bonds, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Bonds and have relied solely on certificates executed by officials of the City as to the availability and sufficiency of the Pledged Revenues. Our role in connection with the City's Official Statement prepared for use in connection with the sale of the Bonds has been limited as described therein. OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to our attention or to reflect any changes in any law that may thereafter occur or become effective. Respectfully, D-4

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128 Financial Advisory Services Provided By CITY OF DALLAS, TEXAS (Dallas, Denton, Collin and Rockwall Counties) Waterworks and Sewer System Revenue Refunding Bonds, Series 2015A and Taxable Series 2015B